Greetings. Welcome to Ecolab’s Third 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, Vice President, Investor Relations for Ecolab. Thank you, Mr. Hedberg. You may begin.

Thank you, and hello, everyone, and welcome to Ecolab’s third 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 are estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the Risk Factors section in our most recent Form 10-K and our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. With that, I’d like to turn the call over to Christophe Beck for his comments.

Thank you so much, Andy, and welcome to everyone on the call. Building on our momentum with strong and reliable growth. That’s the headline for Ecolab's third quarter. Thanks to exceptional execution by our team, Ecolab delivered a very strong quarter as our momentum continued with 7% organic sales growth, which was exactly as expected and 18% growth in adjusted earnings per share, reaching the high end of our expected range. Against unpredictable macro conditions, we drove continued strong pricing, new business, accelerated volume trends, and continued robust margin expansion. Our focus remains on offense, which we excel at, continuing to fuel strong and consistent double-digit earnings per share growth. We maintained strong organic sales growth with pricing increasing by 7%. This increase reflects both the value-based pricing we implemented last year and the new pricing we’ve instituted this year, reflecting the enhanced value we offer to our customers. Our volume trends continue to strengthen as well, which is great news, with new business helping to accelerate volumes despite softening in global end market demand. Organic operating income margin continued its impressive expansion, up 160 basis points compared to last year, reaching 15.5%. This notable progress reinforces our path towards achieving our long-term margin goal of 20%. In the third quarter, our adjusted gross margin expanded 360 basis points to 41.3%. This strong expansion is a result of our value-based pricing strategy, improved volume trends, and a slight decline in delivered product costs. While global energy prices remain dynamic, we’re confident in our value-based pricing strategy and, if absolutely necessary, our capacity to implement energy surcharges. We continue to take a prudent stance on the trajectory of delivered product costs as costs remain up nearly 40% compared to pre-inflation levels. Assuming the current high energy price environment persists and our costs ease only slightly in 2024, we continue to expect very strong gross margin expansion in the quarters ahead. This will help us make progress in achieving our historical 44% gross margin and our 20% operating income margin target over the next few years. Underlying productivity also remains strong as we continue to leverage our leading digital capabilities. As expected, SG&A expense was relatively stable versus second quarter levels. The year-over-year comparison reflects the rebuild of incentive-based compensation, a result of our strong sales and earnings growth and the strategic investments in our growth engines. We also expect SG&A dollars in Q4 to remain very consistent with second and third quarter levels. Our performance further strengthened across our businesses. The highlight was Institutional & Specialty. We grew organic sales double digits and organic operating income, 28%. Organic operating income margin was up 260 basis points to 19.3%, approaching its historical 20% level. Our Industrial segment also performed well, especially compared to an extremely strong Q3 last year, led by attractive growth in Food & Beverage and in Water as our unique ability to bring end-to-end water and hygiene technologies to customers continues to drive strong share gains in this segment. Operating income growth is the best in the third quarter, reflecting the incentive-based compensation rebuild as mentioned in the last call. Importantly, we expect this segment’s operating income to return to double-digit growth in Q4. Our Healthcare bifurcation strategy is progressing well. Strong pricing and new business improved underlying sales growth and operating income. The business also benefited from larger-than-normal surgical sales, which is not expected to recur. While we are pleased with our progress, delivering sustainable and profitable growth remains a focus for me and for our team. Life Sciences growth also improved to mid-single digits despite continued short-term pressure for everyone in this market as our team continued to win share. While we expect the market to remain under pressure for the next few quarters, our ongoing investments in additional new product capacity and keen capabilities will allow us to capitalize on attractive long-term high-growth, high-margin opportunities. In summary, in the third quarter, we delivered as expected with strong sales and solid earnings growth. Now looking ahead, we expect our strong performance to continue in the fourth quarter with adjusted earnings per share increasing 17% to 24% versus last year, which is above the mid-teens growth we had guided to during our second quarter call, and will bring the full year EPS north of 2019’s EPS. This performance is expected to be driven by new pricing, volume growth, and robust gross margin expansion expected to be up 250 to 300 basis points versus last year. As we shared with you at our Investor Day in September, we see continued strong momentum in 2024. Even as global uncertainty remains with softening macro demand, we continue to expect mid-teens or better growth in adjusted earnings per share in 2024. As always, we’ll remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing leverage, and returning cash to shareholders. Most importantly, with the best team, science, and capabilities in the industry, we will continue to grow our share of the stable and high-quality $152 billion market we serve. I believe that Ecolab’s long-term fundamentals are stronger than ever, and I am confident in our outlook for continued strong performance as we work to deliver superior shareholder returns. So, thank you for your continued support and your investment in Ecolab. I look forward to your questions.

Thanks, Christophe. That concludes our formal remarks. Operator, would you please begin the question-and-answer period?

Our first question comes from the line of Tim Mulrooney with William Blair.

So, I see you eclipsed 19% operating income margin in institutional in the third quarter, which was great to see. If you go back to pre-pandemic times, you were doing about 21% operating income margin every year on an annual basis. I think there’s some debate amongst the investor community about whether or not Ecolab will ever get back to those 21% operating income margin days or if the business has structurally changed. I’d love to get your perspective on that, Christophe, how long that might take, particularly given the good momentum that we’ve seen this quarter?

Thank you, Tim. I have no doubt in my mind that we will get there. We have a great team running a great business and a great trajectory. As mentioned many times, the P&L of Institutional & Specialty will end up in a better place post the cycle versus previous years like 2019. Just for perspective, in Q4, as mentioned during Investor Day as well, our operating income dollar will already be back to the 2019 level. So, I expect to cross that 20%, 21% line in the next few years while we drive new business innovation, pricing, the advantages of the new organization with the focus on sales and service and leverage digital technology, as we’ve done over the past few years. Of all the opportunities we have in front of us, all the challenges that we might be facing, I think Institutional is going to be probably one of the best promises that we have ahead of us.

Our next question comes from the line of Seth Weber with Wells Fargo.

You mentioned several times in the slides and in your comments about new business wins. Can you talk about the selling environment, your progress with new wins, and how we should approach new ads going forward? Thank you.

Thank you, Seth. Well, selling new business is what we excel at and what we enjoy the most. So, we shifted to offense over the past few quarters, and that is delivering results because our team is genuinely focused on driving new business with our customers in a more challenging environment, which has always been the case at Ecolab. Our customers are looking for ways to improve their operating performance, which is what we’ve always done for them and what they need the most right now. So, they’re very receptive to what we can do for them. At the same time, we’re bringing all the offerings from the company, especially Water and Hygiene in Industrial segments, but also in Institutional, which are very well received by our customers, and we have made significant innovations over the last few years, which are addressing customer challenges or opportunities. Overall, the team is focused on what they truly enjoy with the right tools, the right innovations, new products, and customers that are open to our solutions, ultimately driving better performance in terms of new business, which is very positive.

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

Hey Christophe, just a question along similar lines, particularly regarding volume expectations. You were confident a couple of months ago that you were going to deliver positive volumes in Q3. I guess it rounds down to zero or maybe flattish is the best way to describe how that came in. You’re talking about positive volume in the fourth quarter. Did Q3 change versus your expectations of where it would come in? How do you envision volume moving into early next year?

Volume is the most important driver, obviously, for us. Q3 happened pretty much as expected. We can talk about rounding here, obviously, but we were in positive territory, which is good. If we exclude Europe, which is the most challenging region in terms of volume, we are at plus 1% already. I feel confident that in Q4 we will have a 1% volume growth overall for the company as well. So, looking at the trajectory we’re on for volume, especially with all the pricing we’ve implemented over the past few years, and in a market that’s not exactly booming, I feel positive about our direction. To your point for 2024, it’s crucial that we close the year with good volume momentum to start 2024 strong, regardless of the environment we encounter. Strength in company sales momentum is our top priority right now.

Our next question is from the line of Mike Harrison with Seaport Research Partners.

Congratulations on a nice quarter here. Just in terms of the Healthcare and Life Sciences business, I’m curious if we saw any of the benefits from some of the changes that you’re making on the Healthcare side of that business already in Q3 or if those actions are still to come? And just curious about the one-time 6% sales benefit. Did that also help margins come in higher, or was that an average incremental margin contribution?

Thank you for your nice comment, Mike. Addressing your question, focusing on Healthcare, not Life Sciences. I know they’re combined, but they tell very different stories. If we have seen some results from the organizational changes in Q3, yes, but it’s still early. I’ve been really impressed with how the team has executed this bifurcation, effectively leveraging the market strength, the breadth, and critical mass of Institutional, both in terms of selling to new customers or existing institutional clients, and at the same time, getting costs down. The team has moved rapidly and effectively, and I’m pleased with our current position. However, it's early in the process, and there is much work remaining for better results in future quarters. Now, regarding the one-time sale related to a contractual commitment that we had to deliver by the end of Q3, if you exclude this, Healthcare showed low single-digit growth, which is an improvement compared to the past but may be what we see in immediate quarters until we can accelerate leveraging the strength of Institutional. Overall, I’m pleased with the progress in Healthcare. I’ve not been satisfied with its performance for many years. I’m happy with the transformation efforts and early results, but there is more work to be done to reach our desired outcomes.

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

Thank you, and very nice quarter, Christophe and team. Just on the delivered product costs, they came in better than your expectations. What drove that? And what are your expectations for Q4?

Delivered product costs were roughly 3% down versus last year, a bit better than we had expected. It’s always a mixed bag; we have 10,000 raw materials we purchase, and they didn’t all move in the same direction, obviously. Some easing in the market and, at the same time, our supply chain team and procurement teams did remarkable work with our partner suppliers. Together, this led to the 3% easing compared to last year. Keeping in mind our costs are still 40% higher than pre-inflation levels, that’s important to remember. I expect similar costs for Q4, basically maintaining the same trend as last year. I don't expect big improvements in the next quarters, but if they occur, we will all benefit from them.

Next question is from the line of Jeff Zekauskas with JPMorgan.

Ecolab buys its raw materials sometimes monthly, sometimes quarterly, and sometimes annually. Raw materials have moved down through the year, but it may be that the timing of your contractual agreements has slowed the benefits for Ecolab. Can you discuss how you purchase your raw materials in terms of repricing? Should we expect different incremental changes on a six-month basis, a three-month basis, or an annual basis?

I have two ways to answer your question: in a complicated way or in a simple way, Jeff. I’ll choose the simple approach. You’re correct; depending on the raw materials, it can be monthly, quarterly, or annually with varying types of contractual agreements. We have a very good team, including new leadership doing exceptional work on procurement. Generally, there is a two- or three-quarter lag between market-to-market price changes, upwards or downwards, that impact our P&L two or three quarters later. That’s the rule of thumb that I use and that you should apply as well.

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

So the Industrial business, I was a little surprised to not see a better margin lift given that you have gotten good pricing there and raw materials look like they’re starting to come off. Can you help us understand the volumes there and whether we’ve reached the bottom in terms of volumes for that business? Do you think it may start to level off?

Thank you, John. The Industrial segment is in a very good place, actually. I'd like to ask Scott to provide some perspective on margin evolution.

Yes, happy to, Christophe. As you're referring to the Industrial segment, growth was at 8%. However, growth rates were impacted by various factors, including comparing against last year’s strong basis. Looking at it over a two-year timeframe, that business is improving. As we've mentioned in relation to SG&A, they are impacted by incentive compensation due to their strong performance this year. However, overall, that business shows strong pricing that we delivered this year, and we’re continuously implementing new pricing. We are beginning to witness easing in delivered product costs. Despite the impact, the operating income remains strong and I think it will continue to improve off these levels. As Christophe mentioned, we expect growth to return to double-digit operating income growth in the fourth quarter, and you'll observe the marginal impact on that as well.

As I mentioned earlier, John, I have a lot of confidence in the performance of the Industrial segment. Excluding the incentive-based compensation, the operating income growth would be in the upper teens, which you’ll observe in the fourth quarter as well. It was somewhat of a one-quarter story, but our underlying performance remains strong.

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

Just a two-part question, Christophe. Regarding pricing, if I recall correctly, mid-single-digit pricing is expected next year. How do you think you can continue to push the pricing dynamic? Then my quick follow-up was regarding the new sales pipeline that you’re confident about; how large is it and how much of a volume headwind can that offset?

Great questions, Manav. They are indeed related. On pricing dynamics, we've had stable customer retention despite our increasing prices, and we’ve seen volume accelerate. This demonstrates our balance between pricing and volume growth is performing quite well. I’m closely monitoring this, as retaining customers for life is crucial for our business. I’m pleased with the pricing we’ve established, and I look forward to what will happen in the upcoming quarters. In Q4, the carryover from last year will approach zero, given it will be annualizing over 12 months, but our new pricing outlook is strong, and I am optimistic about the new pricing adjustments we expect to implement in Q4. It’s still early to delve deeply into 2024, but I believe we’ll be pleased with our pricing while we continue to accelerate volumes. Regarding net new business, we are reaching record levels quarterly and annually, as our team focuses 80% of their efforts on it. That's what we excel at and enjoy doing, as previously mentioned. These good results ultimately offset the global demand softening.

The next question is from the line of Shlomo Rosenbaum with Stifel.

Hey Christophe, I want to revisit a previous question in terms of volume. It appears that after three quarters of negative volumes, you’re starting to see positive territory. Could you elaborate on some standout categories? Which volumes are increasing and which are decreasing? I know you mentioned geography, but could you also give insights by business unit?

To keep it simple, the categories on the soft side include Paper, which you mentioned, and Europe as a second point. Those are the two laggards. Everything else is trending positively or improving if previously negative. I’m particularly happy with the improvements in Institutional & Specialty and Water, which are set to keep improving in the coming quarters based on current observations. We have also seen success with pest elimination, which is seeing strong steady growth and improving margins. Overall, our business is in a healthy place with a few areas needing our attention, specifically Europe and Paper. On the point concerning Europe, margin improvement has been strong. While volume remains a challenge there, we have almost doubled our operating income in Europe in Q3, highlighting the team’s excellent work.

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

Scott, I noticed there was $26 million in restructuring, and the total exclusions were $0.13 for the quarter. You alluded to previous expectations of 5, and actually the guidance for Q4 is pretax around $30 million based on my calculations or $0.09. Could you discuss the restructuring actions in the quarter and the upcoming quarter? Which segments or geographies are affected? Is this another restructuring program like those from the past or can you share operational effects you're aiming to achieve?

Yes, certainly, Andy, happy to address that. The special charges related to restructuring were higher than we had anticipated for Q3, due to the timing of the phasing of our combined savings program that we had announced earlier this year. This program focuses primarily around Institutional & Healthcare and as well as Europe, where strategic actions began at the end of last year and expanded earlier this year, which drove a part of that increase. However, as previously communicated, approximately 90% of those costs will be concluded by the end of next year, so there will be a minor tail into 2024. The benefits of our program are evident in Healthcare and we’re seeing great improvement in the Institutional businesses, and that is where the focus has been. We’ve also observed significant margin improvements in Europe as discussed by Christophe.

I’d like to add some comments. I fully support what Scott just mentioned. I'm pleased that most of the combined programs will be wrapped up by the end of this year, which aligns with our plans. Additionally, we know that digital technology and artificial intelligence will create new productivity opportunities for us in the future. Currently, nothing is explicitly defined in our plans, but we will keep our eyes peeled for opportunities to improve productivity through technology in the coming quarters and years.

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

Christophe, I’d like to hear your views on your four key product areas: Water, Hygiene, Energy, and Pest, particularly regarding potential share gains. Additionally, would you expect your SG&A to increase over time correspondingly with revenue growth, or do you see a pathway to potentially reduce that headcount while utilizing your digital approach for greater efficiency to help reach your 20% operating margin goal?

Two questions embedded in yours, Steve. Starting with share gains, we aren't a consumer goods company, so it's a bit complex to derive exact figures. However, directionally, Institutional & Specialty is up 12% in a flat market, indicating notable share gains. Pest Elimination has grown double digits while competitors are either in single digits or declining. The Industrial segment, even amid a very strong last year’s comparison, shows mid-single-digit growth against a negative PMI in the U.S. and EU. This suggests we are gaining market share. Furthermore, Healthcare is rebounding, demonstrating healthy performance indicators. Overall, I'm very pleased with our comparative progress in the marketplace. Regarding SG&A, as I've previously mentioned, I expect the company to be significantly larger in the coming years, but I don't anticipate a proportionate increase in our team size. While I don’t expect a net reduction in the team, it may shift across different functions. My top priority is to ensure that we bolster our front-line teams serving customers. We will leverage digital and AI technologies to enhance productivity, enabling them to serve more clients, sell more solutions, and focus on delivering value for customers. Thus, while I expect our SG&A ratio to continue decreasing over the coming years, I want to ensure we also enhance the impact of our front-line roles with customers, a central aspect of the company’s history.

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

On the Life Sciences business, how should we think about new business growth and investments into next year, considering some ongoing short-term weakness versus the long-term growth opportunity and margin expansion highlighted during your Investor Day?

Regarding Life Sciences, we saw improvements in the third quarter, which is encouraging, despite a generally declining market. I view this as a short-term industry impact, as pharma and biotech present promising future growth opportunities, even if there are some challenging quarters ahead. Our performance indicates that positive growth is tied to new business generation and market share gains against competition. In line with our direction at Investor Day, we are investing in production capacity to ensure we have adequate resources for our future growth—this is not restricted to one location but will extend across Asia, Europe, and North America. Simultaneously, we are building capabilities such as enhancing our team and R&D expertise. Even if the market may differ in short-term dynamics from our previous expectations, our investment plan has not altered; the future prospects remain unchanged, and any current market impacts are merely temporary.

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

I'd welcome your updated thoughts on the Healthcare business. In terms of operations, would you anticipate that sector to grow in line with your corporate average next year, or perform better or worse? Also, I believe you have now separated infection prevention from Surgical. Could you elaborate on the early benefits in customer interactions and productivity associated with this change?

Thank you, Kevin. Three points to address. First, the bifurcation between infection prevention and surgical is progressing well. This provides the surgical division with the right focus, serving a different clientele than infection prevention, which is closer to Institutional operations. This is enhancing growth for the surgical business. Additionally, since infection prevention is now managed by the institutional team, we gain broader reach, as they serve significantly more hospitals compared to the previously smaller healthcare unit, leading to immediate growth and cost synergies given the larger operational base. In terms of expected growth performance, short-term, I anticipate that Healthcare may trail the company’s average. Over the long term, my goal is to align Healthcare’s performance with or exceed the company average, but achieving this will require ongoing effort and focus.

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

Just a question regarding inventories. I noticed that they are down, maybe in the mid-high teens year-over-year, but your volume is kind of flattish, and the price of delivered products is increasing. I’m trying to grasp what’s helping the inventory come down and enhance working capital performance.

Thank you, Vincent. I’ll defer to Scott for insights.

Thanks, Vincent. To address your question, our Q3 working capital showed a favorable improvement of approximately $250 million compared to last year, primarily driven by targeted inventory reductions. Our Days of Inventory on Hand decreased by about 10 days compared to the end of last year. This achievement has been enabled by our supply chain team, which has managed to create commendable resilience while allowing us to pursue and reduce inventory levels. I anticipate strong free cash flow growth through the remainder of the year and expect our free cash flow conversion to exceed historical levels, which tend to be in the mid-90s, forecasting above 100% conversion this year on a full-year basis.

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

Congratulations to everyone on that great quarter. The Institutional business did really well. I was in several hotels recently and observed that the level of cleaning, changing sheets, changing towels, etc., has significantly decreased. I know you are adjusting your operations to reflect this new reality. I would appreciate more details on what you’re doing, as it impacts your ability to sell your products and services.

Thank you, Rosemarie. This is a core focus between us and our hospitality customers. Initially, it was driven by a labor shortage that prevented full operations, which remains a challenge for the industry. At the same time, they found that reduced labor resulted in lower operational costs while maintaining high margins for institutional customers. This has been beneficial for the industry and, consequently, for us. Yet, quality standards must return to previous levels. This is precisely why we are focusing on products that deliver superior quality and cleanliness with reduced labor. We’ve shifted our innovation efforts towards increasing automation for our customers to enhance cleanliness while requiring fewer staff resources. Hence, the institutional industry, which had remained unchanged for a long time, has undergone a significant transformation, leveraging technology more than ever. This will undoubtedly elevate our partnership with customers, allowing them to perform better as we promote the innovations available. Overall, this is positive news, and cleanliness standards are expected to improve significantly in the hotels you visit.

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

Christophe, could you provide an update on data centers and animal health, which have been focus areas for around five years? Can you share growth rates for both and how significant they have become within their respective subsegments of Industrial?

The two are distinct from each other. Data centers are growing at incredible rates; we haven't disclosed exact figures but expect it to remain strong and accelerate. It exceeds 30% growth, which is remarkable. With increased cloud services and higher demand for computational power, there is also limited water availability. Few can meet the need for expansion while reducing water consumption and maintaining near-continuous uptime—this aligns with our capabilities. Focusing on this segment and having a dedicated team proves beneficial, and I believe we are just at the beginning of this growth journey. In contrast, animal health is a different story, as the food industry shifts away from antibiotic use—where it’s applicable, higher hygiene standards in farms are essential. This area has been developing over the past few years, and though it may not experience exponential growth like data centers, it is still in a solid position and complements our Food & Beverage operations well. I value the investments and focus we are placing on both industries; however, the growth trajectories differ significantly.

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

Two quick ones, probably both for Scott. When I looked at SG&A, it appears flat in the fourth quarter. Considering normal seasonality, would it shift differently during next year? It gets me to projections around $4.4 billion to $4.5 billion, which implies another 10% increase. Is that the expected trajectory, or do you see it moving differently?

Yes, Josh, I’ll address both follow-ups. First, considering our SG&A and where we are today, we have strong liquidity based on our free cash flows for Q3, ending with around $1 billion in cash. For the upcoming maturities due in December and January, approximating a little over $1 billion, my expectation is to pay those down. Our long-term capital allocation focus remains intact, and we are committed to deleveraging. The leverage ratio was around 2.5% at the end of Q3, and I’m confident we’ll revert to our historical range of about 2 times by the end of next year. Regarding SG&A, as discussed, the Q3 dollar figure aligns with our expectations—we expect similar levels in Q4 year-over-year largely due to incentive compensation fluctuations. Still, productivity is robust. We observed a year-over-year decline in headcount, down about 2% in SG&A, with a sales per head increase of about 7%. This illustrates good productivity, and while it’s too early to discuss 2024, we aim to maintain strong productivity growth into next year, utilizing the technology we continue to deploy and ensuring our sales team can dedicate more time to delivering value for our customers.

To build on Scott's comments about SG&A, it’s fully within our control. We've shown over the years that we can appropriately enhance productivity, not through austerity but via automation and by focusing teams on providing value to our customers. I expect continuing progress in the coming years via digital, AI, and other methodologies. As for cash flow and the balance sheet, maintaining a robust balance sheet has always been paramount for us—especially now. We aim to tighten working capital and strengthen cash flow through volume, new business, and pricing, promoting sustainability and efficiency amid this situation.

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

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

Thank you. Ladies and gentlemen, thank you for your participation. This concludes today’s teleconference, and you may now disconnect your lines. Have a wonderful day.