Greetings. Welcome to the Ecolab's second quarter 2025 earnings release conference call. At this time, all participants are in listening-only mode. The question-and-answer session will follow today's formal presentation. If anyone should require operator assistance during today's conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce your host, Andy Hedberg, Vice President of Investor Relations. Andy, you may now begin the presentation.

Thank you. Hello, everyone. We also work for you.

Thank you so much, Andy, and welcome to that team delivered another very strong quarter. Once again, very consistent with our guidance. Our team's relentless focus on execution and delivering exceptional value to customers enable us to achieve double digit earnings growth despite the organic sales continue to grow through the sense led by strong value pricing, solid momentum in our core business driven by a one Ecolab strategy overcame and even and market demand, particularly in our paper and basic industries. This is a major strength of Ecolab, allowing us to deliver, as we had to deliver best-in-class business outcomes. In the second quarter, we also began implementing our trade surcharge for all customers in the United States only. Given the dynamic international trade environment, this surcharge, coupled with the expertise of our world-class supply chain team, enables us to reliably supply our customers while delivering value that exceeding the headwind create global water performance was led by food and beverage which accelerated to contributing very well on our one ecola growth strategy being in water offering the strength markets and markets in paper and businesses global growth engines which best elimination organic sales growth accelerated to 60 nicola growth strategy income margins increase senior to deploy pest intelligence licenses grew mid single digits led by strong double-digit growth in biopharma and a high margin, biopharma, reported away margins to stay at 30%, and operating income margins exceeding 20%. We're just at the beginning of this million. Personal performance combined with value price in Ecolab's second quarter operating income margin. When commodity costs anticipated to keep in total operating income margin to remain margin by 2027, and as mentioned, we will not stop there. Looking ahead, most business fundamentals seem to be trending up, which provides me with the confidence to deliver 12% to 15% adjusted EPS crawls for the quarters to come. As we also keep investing, navigating past macro challenges has only strengthened our capabilities and agility. With our diversified portfolio, record innovation pipeline, strong growth engine, and focused execution, we have plenty of options and levers to deliver on our to make innovative solutions that drive best-in-class outcomes, enhance operational performance, and conserve vital resource confidence, and continue trust.

Thanks, Christoph.

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

Christophe, Scott, good afternoon. Good afternoon, Tim. Yeah, so for my question, I wanted to ask, you know, I think some folks were thinking maybe that you would raise your guide or maybe the low end of the guide a little bit this quarter so so even though the second quarter came in line with expectations i think some folks were maybe expecting a little bit more for the the second half of this year can you just walk us through the puts and takes here is there is there maybe some conservatism being baked in here or is there maybe something else that i'm not seeing thank you hey thank you it's actually a combination of both conservatism and at the same time investing further in our

growth businesses 13 growth on earnings so for the second quarter guiding these 12 to 15 for the second half and beyond for me this is the commitment I've made to all of you guys and this is where I want to make sure that at least I deliver that actually well really like where we are right now so we have good momentum with as mentioned 85 when i mentioned before uh that represents close to well they're growing double digits so our investments in growth for ai infrastructure purification for life sciences and productivity for hospitality and and pest intelligence while they're all trending you know our business fundamentals of turn value price productivity they're all trending in a positive direction a complicated place for the unexpected Our next question is from the line of Manav Patniak with Barclays.

Please receive your question.

Thank you. Christophe, I just wanted to touch on pricing. I understand from a volume perspective, obviously, as you mentioned, there was an uncertain place, etc. Can you help us dig through what you're hearing, what you're seeing on the pricing front? I think the 2%, I believe, was supposed to be 2.5% to maybe a bit higher. if you could just talk about what we should expect in the second half with and without the surcharge pricing that you have coming in.

Yeah, thank you Manav. I like a lot where we are on pricing and keeping in mind it's value pricing. We've made that commitment to customers as well that we will always deliver more value which means cost savings in the operations than the incremental price they take for us it's kind of a value share that's the important in our company so 2% in Q1 2% in Q2 starting the US trade surcharge as well in the second quarter so far so good you announced it so for Q3 Q4 pricing to move closer to me so I don't know exactly where we're gonna land in Q3 but in Q4 it's going to be it's going to be three hopefully will be three or close to three as well in Q3 but all trending up and again value delivery so for our customers and what's most important is that the retention of our customers which is something that we look at very closely is getting stronger next question comes in the line of Ashish Sabhadra with RBC Capital Markets

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

Thank you, Ashish. We love that business. Pest elimination is just an unbelievable story, which will shift towards pest intelligence. It's not going to take forever. Best elimination, the business that we have today, with our people going and visiting every location and looking at every device. Definitely enough, when we think about the pest-free ratio, that 92% of the locations are pest-free, the average for equal to locations, that 99% of the potential model is going to become...

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

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

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

Yeah, absolutely.

Hi, John.

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

So the combination of supply chain doing an amazing work to get a net DPC that's favorable and value price is obviously driving...

Next question is from the line of David Begleiter with Deutsche Bank. Pleased to see you with your question.

Thank you. Good afternoon.

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

So a few questions in there, David. it's the first on competitors they've announced a trade surcharge i'm not in their books obviously so i don't exactly know what they're doing the good thing is that we're gaining share good that they're all participating and that we love in terms of delivery it's an imperfect concentration we see those any market out there we have the mechanic you can use it so country thank you

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

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

Question, Chris. Well, what it's telling me is that it's working because INS, the highest level of margin they've never had in their history, This team is doing unbelievable work by really focusing on its labor automation, labor optimization. They have a hard time to get talent, and the talent they're getting is at a higher cost, which is so much for the people. So when I look at automation, it works for them. It adds them, we use them all through, driving value for our customers and driving, well, net to them.

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

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

Yeah, so two different businesses, obviously, it's our best intelligence, which are truly better mousetraps. It feels easier to do than it truly is to get that working really, really well millions of times. Getting ahead of our skis is nothing to do. Obviously, it's all having one. It's going to take the whole business to work. In life science, capacity limitation production over there, that plan, that's okay.

Next question. I'm from the line of Patrick Cunningham with Citi. Please, Citi, is there a question?

Hi, good afternoon. Thanks for taking my question. Maybe just a related follow-up there on water. I think that operating income growth was rather modest relative to solid pricing growth and good underlying growth. there. You know, I think you cited supply chain costs and unfavorable mix, but I think our assumption was some of these faster growing markets had better mix. So what was the source of that unfavorable mix?

Scott, do you want to answer that question?

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

Next question is from the line of Shlomo Rosenbaum. Let's see if there's a question.

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

Thank you. thank you uh yeah two very different questions so on uh on best elimination the short answer invest intelligence is not an obvious shift it's a pretty significant shift so within our organization it's new technology it's a new route model it's a new financial model it's a complicated piece uh if i may say so to make it work really well and on top of it as you You know, we had a few incidents that we had to deal with, unfortunately. So it was kind of behind us. We keep investing on best intelligence because it's going to help us really lead that transformation in the U.S. Income margins. So it's kind of a demonstration of what accelerated growth is going to happen in the outside environment.

Our next question comes from the line of John Roberts with Mizzouho Securities. Please receive your question.

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

It's been a while. End of 21, we did PureLight. We did a few smaller acquisitions in the meantime, which is the bread and butter of our M&A engine, bigger ones. And you're right, we have very low. It's going to keep getting lower as is by. It's putting us in a great position and where it makes more sense. And John, we're going to keep investing as both in dividends. It's in our business and we have plenty of opportunities. We talked about innovation. So it's on our customers' technology. And then there is the M&A. I really like the pipeline that we have. Very focused on the three areas in life science. capabilities we have uh at the same time the next question comes from the line of

jeff stakakis with jp morgan please receive your question uh thanks very much um in the in the water business the organic change was uh two percent and and i i think your water business grew, maybe volume screw one. Please correct me if I'm wrong. And your overall price for the company was 2%, but it seems that it was lower in water. So is the challenge for the second half to get better pricing in the water division? And do you need it in paper and in heavy industry where you're contracting a little bit. Is that the challenge for the second half in pricing?

No, pretty strong. They've invented it. So they know how to do it. They've been good at delivering it. At the same time, we make absolutely sure that we get the value price when we truly get within. Closing by segment, as you know, so price or not, it's our power business.

Next question is in the line of Andy Whitman with Baird.

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

Hey, thank you, Andy. I'll pass this to Scott. I'm not more of an expert than you.

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

Our next question is in the line of Matthew Dillow with Bank of America. This is your question.

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

It's two things, actually, Matt. When you think about life science, the margin growth in Q2 was especially driven because pharma, biopharma, the mix of margins was in quarter. So very good. Interestingly enough, in that business, it's a little bit depending on the deliveries as well that you can have. So depending on the exact timing of deliveries, it might. But what's most important...

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

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

Hey, good to hear you, Mike. I'll pass it to the cloud, as you said.

First, I'll just start by saying our priorities around capital allocation have not changed. As Christoph said before, it's dividends, invest in the business, and what's left over we think about buybacks. as you said balance sheets in a great position that leverages down to 1.7 and just for reference our long-term target is around two times so in a very good position as you said about 1.9 billion dana q2 that included 500 million dollars from a bond offering we did in june and that was in advance of a euro maturity of about 525 million in that we paid down in july so there was a little bit of a timing from the bond offering on the maturity here but still even after that cash remains um high but it's really the fact that we have this strong balance sheet and we like the option optionality gives us to create value particularly in this environment right as christophe said we get to invest in the business capabilities capacity firepower innovation but at the same time uh we have a very good m a pipeline uh that will be opportunistic about but also very disciplined and a great position to to enhance value by investing in those growth growth engines that he talked about water ghg life science and digital uh and but to be disciplined about it to make sure we drive great returns. So, we like the position where we're in.

The next question is from the line of Lawrence Alexander with Jeffrey. Please receive your question.

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

So I don't have an exact answer to that. I don't think that Scott has one either, but it's four businesses first, and depending on how it counts, it can be even five because it's life science, it's GHT, and it's Ecolab Digital. All four double digits. So if margins are over average, and as you know, we invest as we go as a business model principle, basically, well, we should have a return that's higher than the average, this math, not the finance guy, they will be booming. When we think about bio-pharma, well, this is the future of pharma. When you think about data centers, well, we're growing 30%. We have technology that no one else has in order to really help being used for cooling, which is 40% of the big microelectronics. Today, using...

Our next question is from the line of Josh Spector with UBS. Please receive their question.

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

You know, it's a difficult question to answer here, but you've heard from Scott in terms of GAPEX, so it's been one percentage point plus that we've invested quite well. It's maybe something we might be continuing to do as well. In SG&A, it might be half a point. It depends how you define that very clearly, but we want to make sure that it's focused on three things. The first one is safe firepower, second is digital technologies, and third is Juan Nicolas. This is where we invest, how we invest, and really making sure that we build those businesses. It's giving you thinking about it, but at the same time, like the life science example, what's the margin? Print most investment so that we know what's the next question.

It's in the line of Jason Haas with Wells Fargo. Please just use your question.

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

Hey, that's a great question. So for Scott, we've done an amazing work in OneEcolab, especially the one company part, which is really aligning the whole company behind our customers by leveraging technology. Gen AI in dramatic ways, probably one of the companies most advanced in that work.

Yeah, absolutely. Jason, as you said, S&A leverage is very good. We drove 50 basis points and expected drive that 20 basis points we talked about earlier in the year as we continue to invest in the business. The one thing I do want to note, I'm going to take the opportunity, not every quarter will be created equal we expect q3 sgna to be up a couple points in part due to fx as you look at fx last year was a favorable item in q3 it'll be unfavorable this year but to get to the core of your question on the savings what's driving that leverage it's one equal app which is allowing us to reinvest in the business out of it that billion dollars but at the same time we're driving great efficiencies as we do that we're ahead of schedule on 140 million of savings. I would say we'll be a little bit north of 50 percent of that realized in 20 a little bit ahead in 30 basis points in 2025 as we continue to then to reinvest in the business. But beyond 25, that platform from one equal average above our historical average, which has been about 20 to 30 basis points.

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

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

No, I don't see any structural issue. And if there were, I mean, we've demonstrated that in the past that we have no problem or in better hands. And if I step back just for a second, one of the big strengths of our company, of Ecolab, is the number of end markets that we're serving, the number of geographies at the same time, which means that when some are struggling a little bit, well, the vast majority is doing well for some being in the green. all at the same time so i see that as a strength of the company and when i think about those two businesses especially in basic industries when i think about power it's been a sleepy business forever and we have most of the nuclear plants if not all of them out there but it's not been growing for a very long time well this is changing dramatically now because of all the developments in electronics. So in the future, I think companies of any indication, where we're trying to be a total paperless consumer product, being here, we will get to...

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

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

Hey, thank you, Scott. I'll pass it first to the other Scott to talk about the BBB, and that covered the other question.

Thanks, Scott. So, hey, net overall, it's still early days, but our expectation is the big, beautiful bill is going to be a net positive for the company as you think about it encouraging investment in the us which is our strongest market market growing really well with good margins uh at least to the tax side of it um a bit early to quantify any impact but i would just tell you where i'm sitting here today i don't expect it to have a material impact on our tax rate frankly but again that overall expect it to be overall favorable to the business on the tax side if anything there be be some short-term um cash tax timing, but for the second half, well, they're going to be more impactful by design.

As you mentioned before, I feel really good with our preparedness, the mechanics of it, so you get, but we don't import that much, at least our fundamentals are really strong as a company. I'd like to end where I totally transparent.

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