Greetings and welcome to the Ecolab Second Quarter 2023 Earnings Release Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Director of Investor Relations. Andy, you may now begin.

Thank you, and hello everyone. And welcome to Ecolab’s second quarter conference call. With me today are Christophe Beck, Ecolab’s Chairman and CEO, and Scott Kirkland, our CFO. A discussion of our results, along with our earnings release and the slides referencing the quarter results are available on Ecolab’s website at ecolab.com/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 in the Risk Factors section in our most recent Form 10-K and in our poster materials. We also refer you to the supplemental diluted earnings per share information in the release. With that, I’d like to turn the call over to Christophe Beck for his comments.

Thank you, Andy, and welcome to everyone. In Q2, our team delivered another very good quarter, building on continued strong momentum and once again making further improvements compared to the last quarter. Strong execution, as well as easing inflationary pressure, helped us get to the upper end of our expected Q2 earnings growth range. In an environment that remains unpredictable, our shift to offense continues to gain traction and our confidence in delivering midterm performance that’s ahead of historical average trends clearly keeps getting stronger. Organic sales growth remained strong at 9%, driven by the steady recovery of Institutional & Specialty with 13% organic growth. Pest Elimination and Industrial follow, delivering 11% and 9% organic growth, respectively. Despite softening global end market demand, overall volume trends remain steady. In other good news, volume excluding Europe improved from flat in Q1 to 1% growth in Q2. So, volume trends are improving further, too. Adjusted earnings per share grew 13%, led by strong organic operating income growth that accelerated from 19% in the first quarter to 21% in the second. Although year-on-year comparisons are getting harder, pricing remained strong at 10% as further new pricing continued to grow. Delivered product costs were 5% higher than last year but sequentially a bit more than expected, which is further good news. We kept working on strengthening our performance, including targeted actions in Institutional, Life Sciences, and Healthcare. Institutional had another remarkable quarter as it continued its very strong recovery, focused on new business and penetration, driving share gains in units served, solutions sold, and sales delivered. Growth, value pricing, and productivity drove strong margin improvements, which we expect to continue in the second half. Additionally, innovation in labor automation positions Institutional as the ultimate leader in the market undergoing a foundational transformation, driven by evolving consumer habits and increased use of digital technology, all good news for us. Our highly attractive Life Sciences businesses were not immune to the short-term market pressure, which led to flattish sales. However, this is much better than competition. Life Sciences' growth potential remains extremely strong. Even if the short-term market transition takes a few quarters to get back to strong growth, we’re staying on offense. We’re taking this as an opportunity to gain share with major customers and to further invest in capacity and capabilities in biopharma and undisrupted pure water, even if it results in short-term operating income decline. As promised, we’re also continuing our rapid transformation in Healthcare. In the first quarter, we announced a restructuring program to rightsize our cost structure. This is progressing well. Now, over the next few months, we will also be creating two separate, yet focused businesses from our North American Healthcare business, Surgical and Infection Prevention. Surgical, which provides protective drapes for surgeons, patients, and equipment in operating rooms, will become a stand-alone business. Infection Prevention, on the other hand, which provides environmental hygiene to reduce hospital-acquired infections, will leverage the critical mass of our North American Institutional field sales and service organization to expand customer reach and significantly improve productivity. This is just a further step on our journey to transform Healthcare into a profitable business that serves hospitals exceptionally well. While we continue to focus on margin improvement, which improved 130 basis points in Q2, we also accelerated our shift to offense. Our 1,100 corporate account managers achieved a record new business pipeline by leveraging enterprise opportunities to drive penetration and by focusing on new business prospects to expand our reach. Our more than 25,000 field sales associates sharpened their focus on exceptional service and deploying new business, which resulted in promising share gains. Our 1,200 scientists remain focused on breakthrough innovations, which enabled customers to achieve better outcomes at a lower total cost through reduced use of natural resources. We’re also ramping up our investments in digital technology. With Ecolab 3D, one of the largest IoT clouds in the industry and our 1,000 digital experts, we’re uniquely positioned to further empower our field and customers to deliver best-in-class performance to unleash unique customer value, improve field productivity, and deliver an exceptional customer experience. You’ll have the opportunity to experience some of this firsthand at our Investor Day in September. In summary, we delivered the second quarter exactly the way we wanted, with strong top- and bottom-line momentum despite the challenging environment. Looking ahead, we anticipate delivered product costs to remain high, but to ease progressively and for global demand to soften further. Although none of this is new, the good news is that we are well positioned to win in this environment as our momentum keeps picking up. In the second half of the year, we expect volume growth to continue improving and gross margins to expand 150 to 200 basis points versus last year. During the last few years, our expertise grew as we maintained our team and rolled out new innovative solutions. Our retention rates remain high as we protected customers from supply shortages. Our margins continue to recover, and our organic operating income accelerated as we drove pricing in thoughtful ways, while increasing customer value. With this, we expect adjusted earnings growth in the third quarter to improve further and to reach 12% to 19% with continued strong momentum as we exit the year. Finally, we’ll remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing our leverage and returning cash to shareholders, as we’ve always done. Most importantly, with the best team, science, and capabilities in the industry, we will continue to grow our share of the high-quality $152 billion market we serve. In other words, our future has never looked brighter. I look forward to your questions.

Thanks, Christophe. That concludes our formal remarks. As a final note, before we begin Q&A, as Christophe mentioned, we’ll be hosting our 2023 Investor Day at our Nalco Water headquarters in Naperville, Illinois on Thursday, September 14. If you’re interested in attending or have any questions, please contact my office. Operator, would you please begin the question-and-answer period?

And our first question is from Tim Mulrooney with William Blair.

Just one question for me today. You touched on this a little bit in your prepared remarks on the institutional margins, but I just wanted to dig in a little bit more. Because I noticed that your institutional margins, they were essentially flat year-over-year in the first quarter. It jumped up significantly in the second quarter, kind of showing progress to rebuilding back to those pre-pandemic margins. Can you just talk about what drove that inflection in the second quarter, why it happened now? And if you think that type of expansion is sustainable in the back half of this year? Thank you.

Thank you, Tim. Great question because Institutional is our largest single business, as you know, in the Company, and they had a remarkable quarter in Q2, which followed a very good quarter in Q1 as well. So, I’ve been very impressed with how the team delivered once again. So, you mentioned it’s up 13% sales growth, 40% operating income growth. So, the team executed perfectly well. And what’s important is that our new model, which we announced a few years back now with focused sales and service organizations, one really focused on driving gains and the other one, servicing customers extremely well, while this new organization is working really, really well. That was the right move that we made a few years back. So, we’re gaining share with new business. This business has a new business pipeline, which has reached record highs over the past few months, and they’ve done an excellent job at executing this new business. Pricing has been very good as well, which has been driven by the total value delivered that they’re providing for customers that need it. So, more than ever, if I look at the unit share as well in the market with the number of units that went down, we’re quite stable versus 2019, which is remarkable. Penetration is up as well with programs like Ecolab Science Certified that are driving the usage of much more solutions than in the past as well in that business. And one other point, I mentioned it so many times. So, since 2019, foot traffic in full-service restaurants, dine-in traffic is down a third. Our sales in that same segment in the U.S. is up 12%, so a massive share gain that we’ve delivered here. So, we expect this momentum to continue in the quarters to come. And I even think that the OI dollars that we had in Q4 2019, well could be pretty closely delivered in Q4 this year as well, which means that we would be, in dollar terms, very close to where we were in 2019. And well, it’s only upside from here. So, institutions did really well. It’s driven by fundamentals of new business, pricing, productivity, and customer service, and I like a lot where we are and even more where we’re going.

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

So, pretty solid gross margin expansion in the quarter, and thanks for providing color on the gross margin expansion for the back half of the year as well. I was wondering if it’s possible to quantify what the delivered product cost was in the quarter. And there was obviously a comment on the delivered product cost to ease, but I was wondering if you could help quantify how we should think about those delivered product costs in the back half. Thanks.

Thank you, Ashish. I’ll pass that question to Scott, our CFO.

Yes. Hi Ashish, thanks for the question. Yes, as you said, gross margins improved nicely. It was up modestly in Q1, 20 basis points, but really saw great expansion year-over-year in Q2, up 130 basis points. As Christophe said, we continue to drive new pricing as well as maintaining the pricing that we’d already achieved and had hit that peak in pricing in Q1, but continue to drive new pricing and then seeing that DPC inflation easing a bit. So, as you said, with that, is that easing inflation on DPC as well as the new pricing that is going to help drive continued margin expansions in that 150 to 200 basis points year-over-year. So, we expect DPC to continue to be up year-on-year, just at a smaller rate as we see in the second half of the year. So, as we said, up 9% in Q1, 5% in Q2 and probably low-single-digits in the second half.

The next question is from the line of Seth Weber with Wells Fargo.

I wanted to revisit the strength of the institutional margin for a moment. Can you update us on the status of the cost-saving program? I'm trying to understand how much of the margin expansion is due to price, volume, and the cost initiatives you have started to discuss, but it’s unclear where you currently stand in that process. Thank you.

I’ll pass that question as well to Scott, but before I do so, the two main drivers, institutional of volume/new business and the pricing that they’ve done really well, also fed by new business and the restructuring that we announced as well earlier, so is going quite well. But I’d like to have Scott provide some more details on that.

Yes, happy to do that. Yes, as Christophe said, institutional margins are doing very well. It’s really a combination of everything. As we talked about earlier this year as part of the expanded program, that expanded program had a total run rate savings of about $195 million. And we expect to realize the vast majority of that, let’s call it, 80-plus percent of it by the end of this year. We’re progressing on track for that, about that pace through the end of Q2, and that represents for the full program as well as the institutional, the I&S business.

The next question comes from John Roberts with Credit Suisse.

Thank you. Nice quarter. Can you give us a rough split of the Healthcare business between Surgical and Infection in North America? And why is Surgical so much smaller in Europe?

So, in North America, it’s roughly half-half. And in Europe, it’s mostly Infection Prevention, which is the reason why the bifurcation that I’ve talked about is happening in North America, because in Europe, it’s a different business, almost focused on infection prevention today already.

Our next question comes from the line of Josh Spector with UBS.

Just Christophe, I’m intrigued by your comments around volume about them continuing to improve. I think a lot of companies have been a little bit cautious about some of the trends in Europe. And I mean, it’s still a relatively sizable market for you. So, what are the drivers that you see that gives you that confidence about volumes improving? And when you talk about that, is that up year-on-year, or is that sequential?

Yes, Josh. It’s year-on-year, so the improvement that we will see so in Q3 and in Q4. And in Q2, I was pleased to see that excluding Europe, our volumes went from flat to plus 1% year-on-year once again. And it’s all driven by the way we are driving the business. Because the end markets, honestly, so everywhere around the world have a tendency to soften, it’s not true everywhere. But for the most part, the softening quarter-after-quarter, hopefully, that’s going to change as well over time. We’re not counting on that. Just to be clear, our assumption is really that the end market trends will continue to soften in the next few quarters. How are we driving growth? It’s the old-fashioned way, by driving fundamentals. It starts with new business. This is a practice that we have perfected over years/decades, as we call it, a grow-to-win pipeline, which is our new business pipeline, is at an all-time high right now. And we need to deliver it, obviously, by executing it, so customer by customer. In some businesses, it’s quicker, like in Institutional, or it takes a bit more time in Industrial, since it’s heavy equipment that we need to install. But new business is really good. Penetration as well of new solutions within existing customers is a priority so for us because it’s the lower cost to execute, because we go to those customers anyway. This is improving as well. Innovation is also in a very good place. Our innovation pipeline is also at an all-time high. So, it’s an execution question as well. So to get that done, especially in what we call the mega markets in North America, Western Europe, and in China, while we follow closely after in the other markets around the world. So, those are the big reasons. And it’s also driven by our new growth businesses, like data centers growing over 20%. Microelectronics, close to that as well. And our water business. That’s doing really well at the same time. So, it’s really focusing on the fundamentals, what we can control, because we can’t control what’s happening in the market.

Our next question comes from the line of David Begleiter with Deutsche Bank.

Christophe, you are investing in the business. Any way to quantify how much more you’re investing this year than last year on either an absolute or a relative basis? Thank you.

Good question. I think that’s for our CFO as well, so he is looking forward to more questions. Last time he had half a question. So, I’m glad that we can do it in tandem today. So, Scott?

Yes. David, what I’d say is, I wouldn’t give you a specific number here. I would say we’ve continued to invest in the business not significantly different than we have in the past. As we’ve said through the last few years, we’ve continued to invest in the business, adding capacity, maintaining the team, investing in the team. So proportionately, it’s not that the big driver of what you’re seeing from the OI margin expansion, any change in that investment.

But maybe one comment I’d like to add as well, so to that, David, is that we differentiate how we invest behind our business. So just to share a little bit how we’re thinking about that as well. We call our growth engines for more investments because they grow faster. They have a higher margin as well. We have another category, which is more transforming businesses that could get better as well. They get a bit less, but they’re very focused in how we can drive our better margins. And then, you have kind of the third categories are the ones that need to become more profitable. They get less investments until they get to the right profitability margin. So, we really do that in a thoughtful manner, by business, by market, making sure we invest the best way we can.

Our next question is from the line of Jeff Zekauskas with JPMorgan.

Your SG&A costs are up 7.5%, which is about your rate of sales growth. Why is it SG&A going up at a lower rate? By contrast, your cost of goods sold sequentially is up 6%, your revenues are up 8%. So it looks like your raw materials are falling, and I take it that that’s giving you some benefit. Is that correct? And then lastly, it’s been a hot summer. So, that gives you above average or better water treatment chemical demand in the third quarter.

Great question. Thank you, Jeff. So three questions here for Scott, I guess.

Hey Jeff. Yes, I’ll discuss the SG&A. Good question. The SG&A was up a little over 7.5% year-on-year in the second quarter. The underlying productivity remains strong. Our headcount has actually come down modestly over the last year, while sales have increased. Our SG&A ratio was flat in Q2, but we’re down about 300 basis points over the last three years. The increase in Q2 SG&A was primarily driven by higher incentive compensation, reflecting our strong performance. Regarding SG&A, I expect the dollars to be stable in the second half compared to Q2, meaning it will likely be in the mid- to high-single-digits for the year. In Q3, we'll face a tougher comparison to last year, but we also anticipate continuing to drive productivity through our digital investments over time.

So, that’s on SG&A. Maybe so an additional comment here. We’ve had that question so many times, Jeff, on have you reached the bottom in terms of SG&A ratio? The short answer is no, because of what Scott just said. All the digital technology that we’ve been implementing, plus all works to come will improve the performance of our organization. So for this year, expect our SG&A dollars to remain kind of stable quarter-after-quarter, keeping in mind that our headcount at the same time is slightly down as well, which is driving that productivity, not because we spend less time with customers. We spend more time, but we automate most of the transactional work, if I may say. Your second question was on delivered product cost. It is easing a bit faster than we had expected, but it’s important to keep in mind, it’s still 40% up versus two years ago, pre-inflation. So obviously, that trend is a positive trend for us, and I’ll take that, obviously, to improve margins as well. But most of the work is on pricing and new pricing, which is going really well. And your last question on the summer. We are in 172 countries. So, it’s not impacting in material ways the business, the way we look at it. So, no influence of that, at least no significant one.

Our next question comes from the line of Christopher Parkinson with Mizuho.

Just on the Institutional side, you have some very helpful commentary by region. I was just hoping to dive down a little bit more on the volume trends in the various geographies, obviously, specifically North America. And just what ultimately is underscoring the confidence in kind of market share gains, just given all of the volume volatility on the post-COVID era. Just any color on that, and just trying to extrapolate, where the real opportunity is heading into ‘24 and ‘25?

On the Institutional side, we have seen broad improvements, particularly in the major markets like North America, Western Europe, and Greater China. We are making good progress in these areas, which are our primary focus. Additionally, other markets are also performing well, although they are not our main investment priorities. Our growth strategy in Institutional involves enhancing our partnerships with global customers through initiatives like Circle The Customer and Circle The Globe. Programs such as Ecolab Science Certified, primarily aimed at North America, help our customers enhance guest safety, boost performance, and increase guest satisfaction when using our products. Many of our clients operate franchise models, meaning that what we provide helps meet the quality standards defined at their central offices globally. We are uniquely positioned to deliver on these standards. Moreover, we aim to improve labor automation, which has positively impacted margins for Institutional customers over the past two years, as they have benefited from higher prices and reduced costs due to labor shortages. Our innovation focuses on enabling these clients to maintain improved margins by automating tasks that were traditionally handled by lower-cost labor. These factors are key drivers for growth in the Institutional sector.

Our next question comes from the line of Manav Patnaik with Barclays.

Christophe, I guess, in Healthcare, apart from perhaps increased focus, I was just wondering if you could help us understand how splitting the business is going to change the growth trajectory here. Because you’ve obviously tried a few different things in Healthcare. So just wondering, I guess, is this one last attempt or does it fit in the portfolio? Just some longer-term thoughts as well would be appreciated.

Good question on Healthcare. So, we will stay serving hospitals with what we do as a company, so protecting what’s vital, reducing hospital-acquired infection remains a point of focus. The fact that our Healthcare business has not been growing and has not made money for quite a very long time is something that I have committed to change. And I made that commitment pretty clearly a year ago. So, what we’re doing is a very thoughtful plan. We’re quarter-after-quarter, I want to make moves that are driving us to a place where it’s a business that’s growing nicely. It’s not going to be high growth, but that we get good profitability. The first move was really in Q1, to do this cost restructuring in North America and in Europe, so to get the right cost base. And that’s evolving pretty nicely. We’re on plan delivering on that front. And I wanted to make a second step, which we announced a week ago to the organization and wanted to share with you as well in the release and on that call, where we want to have those two businesses, Surgical, which is really focused on drapes protecting surgeons’ equipment and patients, which is very different than our Infection Prevention business, which is much more traditional Ecolab business of hygiene and disinfection, infection prevention. Well, those two businesses, we want to have them separate. They’re more focused. They’re serving two different parts as well in the hospital. And most importantly, our Infection Prevention business, which is the one with the lowest profitability, cannot afford the cost structure that we have today. On the other hand, leveraging the huge sales force that we have in Institutional in North America, well, they get immediately a much broader reach on the market because institutionally serving hospitals on the food service and hospitality side today already and at the same time, get a huge boost in terms of cost productivity. So, improving Infection Prevention business performance, kind of almost overnight, it’s going to take, obviously, so a few months to get there, but it’s kind of a sure thing. It’s in our hands, while the Surgical business, which is doing quite well and with good margins, is going to remain a focused business. So, we have those two businesses in a better place, and that’s the next step that we want to execute towards our ambition to have a good Healthcare business ultimately.

Our next question comes from the line of Shlomo Rosenbaum with Stifel.

I actually want to piggyback on Manav’s question. Is the Infection Protection business going to be kind of folded into Institutional? If you’re going to be leveraging their sales and service organization, what is going to be kind of standalone on its own? And by separating these businesses, does it also make it easier, if you can’t get them to the place you want to be to kind of sell them off in bite-sized pieces?

So a lot to unpack in your question, Shlomo. So, I’m not going to comment about the future. It gives us more options, let’s put it that way. But we’ll have those two businesses. One, our Surgical business, our Drape business is going to be standalone with its own divisional structure and supply chain. So very verticalized, if I may say. The Infection Prevention business, we’re going to have the best of both worlds, because we’re going to have a division that’s focused on corporate accounts, on marketing, on innovation, R&D, really driving that business strategically, while commercial execution is going to be done by Institutional, where you get much more reach and a much better cost structure as well at the same time. So, two focused businesses. Surgical, totally verticalized; Infection Prevention, a separate division, but leveraging Institutional as their commercial arm.

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

I wanted to dig into the Life Sciences performance in the quarter and your comments, Christophe, about how there’s some short-term disruption in that marketplace. I was hoping you could elaborate on this, perhaps address what’s the cause of the short-term disruption? Or perhaps maybe that’s related to the prior few years, with all the vaccines and COVID and other things like that, maybe we just need to come off of that period, I don’t know. And if you could just talk to the confidence that you have in the recovery. It sounded like it’s not going to be necessarily right here in the third quarter, and you said, I think maybe the comment was a few quarters. But any detail that you can give to support the return to that growth in Life Sciences, including whether that’s the legacy Life Sciences business or the newer filtration business that you’d acquired a year or so ago?

Thank you, Andy. Life Sciences has been a strong sector for us since we integrated various components back in 2017, and I believe its future looks even brighter. We are entering a golden age for pharmaceuticals, with biopharma emerging as the leading method for developing drugs and vaccines, as we have seen during the COVID pandemic. While the industry currently faces some challenges, I feel optimistic about our stable growth, especially when compared to our competitors who are experiencing significant declines. This stability can be traced back to the residual effects of COVID-related production and inventory issues, but I anticipate that this situation won't last much longer. We may not see a significant improvement in the third quarter, but I expect better results over the next few quarters. Reflecting on the past year regarding Life Sciences, I feel increasingly positive about the market and our business trajectory, which is why we choose to remain proactive even in a challenging market environment. We are focused on attracting new customers, expanding our capabilities—including expertise and resources in research and development—and scaling up production for future demands. While these investments may temporarily affect our operating income margin, the long-term potential of this business, which typically operates at over 30%, makes it worthwhile. Although we may face a few more pressured quarters, I am confident that we will reach a more favorable position, and Life Sciences is looking more promising than ever. Therefore, I feel good about the prospects in this sector.

Our next question is from the line of Patrick Cunningham with Citi.

So, we’re starting to see some deceleration on pricing. What can we expect from normalized pricing going forward? And specifically on the water business, you’ve highlighted the unique competitive position and customer sustainability objectives. Do you think that will translate into higher pricing power relative to historical pricing?

So, two short answers here, Patrick. The first one is the deceleration of pricing. As you mentioned, is 100% related to year-on-year comparisons. The carryover, we’ve kept 100% of it, including the energy surcharge, by the way. And on top of it, we’re expanding as well new pricing because we’ve become as well even better. We’ve always been good at pricing as an organization. Well, over the past two years, we’ve become even better because it’s been so much related to the value we’re creating for our customers or the savings in their operations in dollar. And we want to make absolutely sure that net-net, it’s a positive story for customers, which it is. So, that’s the first answer, entirely, so the slowdown entirely related to a year-on-year comparison. Carryover is stable, and pricing is expanding, which leads to the second question, pricing for the future. I don’t know where it’s exactly going to shake out. We’ve been always within the range of 1% to 2% in the past 10 years or pre this inflationary time. Post that cycle, whenever that cycle is over, is going to be better than that. I don’t know exactly what the number is going to be, but it’s going to be north of two. That’s for sure.

The next question is from the line of Laurence Alexander with Jefferies.

So, it sounds as if the path to positive volumes in the back half is you’re widening the spread that Ecolab can get versus the end markets. How do you see that developing in 2024, 2025? Do you think you can keep the new wider spread or expand it further, or do you see kind of this as a bit countercyclical? And as the end markets recover, maybe Ecolab’s volume spreads sort of compresses a little bit?

We’ll see where we end up in ‘24. If I’m looking at currently, I’m pleased with the fact that we’re better than the market. The fact that we’re improving ex-Europe, as well in Q2 and that we are in positive territory is a very good sign. I like the evolution that we’re having in Europe as well. We have a great team doing very good work over there. So, Europe is going to improve as well. So, over time, new business is very strong, as mentioned earlier. So it’s really focusing on what we can control, new business, penetration, innovation, enterprise selling. Those are the old-fashioned good ways of driving volume. We’ve been successful so far. As mentioned, the last two years, we focused primarily our attention on pricing and margin. We shifted our attention primarily on volume a quarter or two ago, and it’s working. And usually, those trends take a few quarters to take hold in our organization. But when we have good momentum, it remains as well. So, I feel positive about where we’re going for the second half, so for sure. And I see no reason why it shouldn’t be good for ‘24 as well.

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

Perhaps a two-part question on the price-cost spread. Christophe, on the price side, would you call out any particular areas where you’re seeing the most positive sequential momentum on price realizations and perhaps other areas where it’s more of a struggle and starting to flatten out sequentially? And on the cost side, really a similar approach or question in that, are there particular areas you would call out, where your costs are dropping fast on a sequential basis and other areas where you have stubborn increases?

Yes, Kevin, I’ll give that question to Scott. But before we get there, again, mentioning and underlining how we look at pricing. It’s really twofold. It’s, on one hand, making sure we keep the carryover, that we don’t give price back. And that’s been working really well across the board and at the same time that we can drive new pricing as well in all businesses. And that’s been working very well as well in the organization. But with that, I’ll leave it up to Scott to give us some more insights.

Yes, thanks, Kevin. As Christophe mentioned, we are seeing the benefits of last year's pricing, which peaked at 13% in the first quarter, and we are continuing to strengthen that pricing this year. Overall, we are experiencing strong pricing across various segments, including I&S, Industrial, Healthcare, and Life Sciences. Much of this comes from the pricing adjustments made last year and the new pricing strategies we've implemented. In terms of costs, the DPC within Industrial faced the majority of the cost increases due to inflation over the past couple of years. As those DPC costs have begun to ease, as we discussed in the second quarter where we saw a reduction to 5% compared to 9% last year, we expect Industrial to benefit the most from this easing trend, given it absorbed a significant portion of the increases.

And Kevin, I’d like to remind you is just two facts I mentioned before as well. We saw Industrial having reached in Q2, already the 2019 operating income margin, which is a very good sign. And I&S, so Institutional & Specialty in dollar terms, not in margins, being back to 2019 in the fourth quarter of this year as well. So, two big indications for our two major businesses that our margin recovery is really well on track, and it’s not going to stop there. It’s going to keep improving.

Our next question is from the line of Steve Byrne with Bank of America.

I would like to know what percentage of your sales includes equipment at your customers that either you own or that is proprietary to you and would need to be removed if a competitor were to take over that business. Additionally, are you observing any changes in the competitive landscape, such as the combination of Solenis and Diversey? Have you noticed anything resulting from that?

So, a few questions in here. So, to unpack, Steve, first, on the equipment question, just would like to remind you is on 95% of our sales are recurring. So it’s not equipment by definition. This is in chemistry or lease programs or digital subscriptions or sales that you get recurringly on a monthly, on a weekly basis. So the equipment components is really, really small. At the same time, since you have equipment in those customer locations, well, it increases the stickiness as well of our business with our customers. Not obvious to change. So from us to someone else, especially, since equipment is not going to be at the same level of technology, need to say the least. But this is not the way we’re driving our business with our customers. We want them to stay with us, not because it’s hard to change the equipment, but because they get the best service, the best customer experience, and most importantly, that their total cost of operation is going down because they reduce their usage of natural resources, carbon, and water, and at the same time, as well as the labor. So, that’s the way we drive our business, 95% recurring, less than 5% equipment. And to your last question about the competitive situation, our competition is busy right now, but we take them very seriously as we’ve always taken them. And the fact that our new business generation is doing really well is a good indication that we’re kind of winning that war.

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

I’m just wondering if you can give us a little more specifics on the volume by segment. I mean, I see what you said for the total company on an ex-Europe basis, but can you tell us anything in particular about the key segments?

Yes, Vincent. So generally, the volume profile is similar in every business. I like a lot what the Institutional & Specialty is doing. As mentioned so many times during that call, they are in positive territory and are keeping accelerating. So they’re at the forefront. They had the most to recover as well at the same time, but basically, so doing really, really well. Industrial, let’s not forget that they had a lot of work to do in pricing over the past two years. And as mentioned before, being in a position to deliver similar margins in this quarter, in the second quarter than what they had in 2019 is a remarkable accomplishment. And now so shifting over the last few quarters, on the new business, what is helping improve as well the volume in Industrial. And to call out as well that Water in Industrial has been positive, remains positive, and has a very good story as well here. And the drag is in paper, which is mostly driven by our customers reducing inventories, after all, the past few years, disruptions that they had. But I like the new business that we have in paper. So paper is going to improve as well. The inventory meltdown of our customers is going to improve as well over the next few quarters. So, all in, Institutional and Specialty is strong and getting stronger. Industrial improving as well, with paper becoming better over the next few quarters. And I’ve mentioned the other businesses getting better as well as we move forward.

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

I have a question for both of you. First for Scott. You mentioned that headcount is down, but SG&A expenses are relatively stable for the rest of the year in absolute terms. Is the difference due to incentive compensation? How should we interpret this, especially after a few tough years? It seems like this year is looking strong. What are your expectations for the second half of the year and into next year? Now for Christophe, I wanted to ask about paper, but I'm also interested in the Industrial segment. You covered paper pretty well, but Food and Beverage is a significant subsegment that has seen double-digit growth for about a year and a half. Are you still gaining a lot of new business there? What does that growth trajectory look like? Could you provide more details on the key submarkets: dairy, beverage, and brewing food, and share some insights on the strengths you are observing?

I’ll begin addressing the SG&A question. The primary reason for the SG&A increase in Q2 was incentive compensation, and I anticipate a similar impact from incentive compensation moving forward. However, this is linked to our strong performance and the rebuilding of that compensation structure. I expect this to remain the largest factor in year-over-year SG&A changes for the second half of the year. As we have worked to rebuild our incentive compensation, we expect it to be less of a burden next year. More importantly, we have successfully managed our SG&A ratio over the past few years, achieving a 300 basis point improvement. Although this year's SG&A productivity or leverage could be more limited due to the incentive compensation, we expect to enhance that leverage in the future, especially as we capitalize on our investments and cost savings initiatives to drive greater SG&A productivity going forward.

Then the second part of your question, I believe, difference on our F&B business, one of our largest businesses. I’m really pleased with the work that the team has done in this business, they’ve been able to work well on both growth and margin recovery. They’ve been impacted, obviously, by the inflationary costs and delivered product cost, but managed well to manage new business and the margin performance. Second, it’s a positive industry. So it’s serving consumer goods industries. You’re familiar with most of them. They’ve done quite well over the last few years, and they’re still doing well today. So, it’s a good place to be as an industry. And the third point I’ll make is that it’s one of those industries that’s very interested in what we do. It’s about food safety, which is essential for them. It’s non-negotiable, obviously, for their brands and our customers do very well with it. And at the same time, they are the most advanced companies in terms of commitment on carbon footprint, water usage, and waste management at a lower total cost, which is exactly what we do for them. So, they are very interested in what we do. And the last point I’ll make is we have this unique position of bringing water management and food safety in one offering, which no company today can offer. We’re uniquely positioned to offer that to our customers. And we perfect that model all the time, and I like a lot where we’re heading because that’s exactly what those customers are looking for, which are the reasons why this business is doing so well.

Our next question is a follow-up from the line of John Roberts from Credit Suisse.

North American Healthcare Infection Protection is going to use the commercial organization from Institutional. Do you have any other examples within Ecolab, of sort of cross-segment collaboration like that? And will that result in any intersegment financial reporting?

So, two parts of your question, John. On one hand, we will, for the time being, still keep that reporting consistent with what we’ve done for now. I can’t speak for the longer term. But for now, I want to keep that consistency to keep the clarity. I made a commitment to you that we will improve the Healthcare business. I truly want to show the improvements that we’re making. It’s not by folding it in something else that we’re going to improve it. So, we’re going to remain consistent and transparent. Now, the second part of your question on Institutional being used by other businesses. The best example I can provide you is for QSR, so the Quick Serve Restaurants, McDonald’s, Burger King, Wendy’s and so on, are always more using dish machines in order to automate the labor they have in their restaurant. As you know, the QSR is a separate business, and it’s been true for 30 years. It’s not exactly a new thing. In here, well, the Institutional team is the one that’s serving those dish machines as well. It works really well because we get the reach because we have Institutional everywhere in the country, and they get the cost productivity because of the critical mass and density that Institutional is having. So, what Institutional is doing for QSR is kind of similar to what we’re looking to do for Healthcare as well. So, it’s a model that we’ve practiced in the past already.

Mr. Hedberg, there are no further questions at this time, I’d like to turn the floor back to you for closing remarks.

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 your day.

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