Conference Transcript - ECL 2026-06-02

Tim Mulrooney, Analyst — William Blair

Thank you everyone for joining us today with Ecolab. My name is Tim Mulroney. I'm the analyst here that covers Ecolab. And I'm required to inform you that for a complete list of research, disclosures, and conflicts of interest, please visit our website at williamblair.com. So I'm really excited to have Ecolab here today. This has been a company that's been a fun one to follow, particularly recently. There's been a lot of news out about the company and we recently added Ecolab to our current better values list last month with the thesis being basically the recent spike in energy costs which have driven the stock price down actually isn't going to result in the impact that you'd normally see at Ecolab. Of course, I know it's famous last words to say this time is different, but we're saying this time is different. That was part of it. The other part was an expectation and acceleration of volumes next year as some of these higher growth businesses get folded into their business. Hopefully, Scott, you don't say anything today to contradict anything I put in the current Better Values write-up. I don't know. but that that was basically what we were we're saying and are very excited when we see dislocations like this in this between the stock price and what we view as the fundamentals so with that I'm gonna pass it over to we're very pleased to have Scott Kirkland here the CFO and Andy Hedberg the head of IR thank you guys for coming today and I'll pass it over to you for some opening remarks

Scott Kirkland, CFO

and then we can hop into Q&A great thank you Tim appreciate the introduction Good morning to everybody. It's great to be here with you today, share with you, especially those new to the story, Ecolab's growth story, but also about how our model is delivering really good performance today, very strong performance, but positioning for us for even better performance in the future. But before we get started, I'd ask you to read the cautionary statement. I won't read it verbatim, but please read it. And with that, I will move on to the fun stuff. So, for those new to the Ecolab story, Ecolab is a global leader in water, hygiene, and infection prevention, protecting people and resources vital to life. Our strong performance comes from pairing that mission with a disciplined business model. What we do matters for our customers, and it helps them improve their performance and profitability. We apply this model across more than 40 industries, driving consistent growth, margin expansion, and strong earnings performance, strengthened further by our growth engines that I'll talk about in a little bit, which are scaling at double-digit rates with very attractive margins. All of this is supported by a very clear financial framework, including strong free cash flows, a disciplined approach to capital allocation, and a balance sheet that provides us flexibility to invest through a variety of economic environments and we have the means to achieve our ambitions with unmatched capabilities and reach. We have 48,000 associates serving customers in more than 170 countries supported by deep scientific and digital expertise. Ecolab is a trusted and innovative partner at millions of customer locations, some of the biggest brands in those industries. In 2025, we protected 1.7 billion people from infection. We protected a third of the world's food production and a quarter of the power generated. The way we deliver those outcomes is through a very simple but powerful model. We deploy on-site experts at every customer site who understand how those customers operate. We then apply chemistry, technology, data and digital tools to improve the performance and reliability at our customer sites the result is a best-in-class performance outcome at the lowest total cost through reduced water energy and waste and because the value we deliver far exceeds the cost of our solutions to our customers the customers see clear economic returns in what we do for them that's what we mean by total value delivered which is a foundation of our growth and that value proposition creates a very resilient model more than 90 of our revenue comes from consumable products that are mission critical to our customers that drive that drives predictability and durability in our business we also benefit from very broad industry diversification both industries and geographies which helps balance performance through different economic environments and reinforces that stability of our growth that stable foundation supports the strong and consistent financial performance and our long-term growth algorithm is clear we target 12 to 15 percent of adjusted eps growth every year through discipline execution and balanced capital deployment we're on track to reach a 20 operating income margin by 2027 driven by value pricing innovation high margin growth engines and productivity and as our growth engine scales we see a clear path to accelerating organic sales growth into that five to seven percent long-term range i know recent macro macro volatility as tim talked about and the energy inflation is top of mind for many investors we see that environment as manageable with the pricing and supply chain actions that we've taken in our history of performance. Our exposure to raw materials derived from oil and gas is about 6% of our total sales. Exposure will only decrease as our growth engines accelerate, as they have a much smaller reliance on oil and gas-based raw materials. And the inflation environment this year is also very different than 2022, when our commodity costs increased nearly 50%. Looking at the current environment and assuming that our energy costs remain high through the balance of the year, our commodity costs are expected to increase this year by about 9%. But we continue to expect to deliver 12% to 15% EPS growth this year, excluding the short term impact of the pending Kool-Aid T acquisition, which I'll talk about in a bit. And we're doing that as our pricing continues to strengthen with the implementation of our energy surcharge which we launched in April. You can see that pricing acceleration we're driving through the second quarter in the slide here. And while higher commodity costs have been a headwind, pricing is quickly building during the second quarter. And in the second half of this year we expect organic sales growth to accelerate to six to seven percent with pricing roughly two times the inflationary headwinds, helping to quickly stabilize gross margins in other words we'll be fully offsetting the impact of commodity costs on earnings and margins in just a few quarters the pricing discipline isn't a new thing for ecolab we have a long history of keeping and growing pricing every year because our pricing is backed as i mentioned before by incremental value our solutions create for our customers since 2021 our solutions have delivered a cumulative value to customers of more than 11 billion dollars and we've captured a meaningful share of that through pricing as you can see here this is a durable advantage that supports both the growth and margin expansion of our business turning to near-term performance with good momentum business momentum and accelerating pricing overcoming the commodity cost inflation as i mentioned we expect strong second quarter with organic sales growth of at least 4%, stable organic gross margins, excluding the impact of the Avivo acquisition, and adjusted EPS growth of 9% to 12% in the second quarter, which is stronger than our initial guidance for Q2. And we expect this momentum will continue into the second half as organic sales growth accelerates to 6% to 7%, and our organic gross margin expands 75 basis points. And with that, our adjusted eps of 14 to 15 percent before the impact of cool it which i'll talk about in a moment as i mentioned the second half of 26 we expect that underlying performance to reach the upper end of our range without the impact of cool it amortization and financing costs including the impact of cool it and amortization financing costs adjusted eps is expected to grow four to five percent when the cool it deal closes looking beyond this year including cool it and the roll off of the nalco amortization we expect our 12 to 15 percent eps growth trajectory to only strengthen as I mentioned with a clear path to the five to seven percent organic sales growth and expanding ROI margins to and beyond the 20 percent target we have for 2027 we've built a portfolio that's both resilient and positioned for faster growth. Our growth engines are scaling quickly. I'll talk more about those in a second and represent roughly a quarter of the business. Our core businesses are also performing well, delivering steady mid-single-digit growth with strong and expanding margins. As 2026 progresses, we expect continued growth improvement in paper and heavy water as we drive good share gains and mitigate softer market demand. And our growth engines are compounding with those compounding the core businesses performing well and our more challenges businesses stabilizing we will grow faster and with strong margin expansion our largest core business is institutional specialty is performing very well delivering mid single digit growth with good margin expansion this strong performance is fueled by breakthrough technology platforms like dish iq aqua iq which help food service and hospitality customers improve guest satisfaction while using less labor and significantly reducing their operating costs we are expanding from anchor innovation like into digital solutions like kitchen iq which is our proprietary digital platform that helps food service customers streamline back of the house workflows enhance food safety management and ultimately optimize labor and we're tying it all together with our one eco lab growth model where we can drive best-in-class performance across our customers' locations, unlocking value for them and growth for Ecolab. All of this translates into strong performance for our institutional specialty segment, growing mid-single digits despite fairly stable markets. And we expect sales growth for this segment to accelerate to the 4% to 6% range in 2026 with strong and expanding margins. The same model and performance shows up in food and beverage. Another one of our core businesses that is outperforming its end markets we are bringing together new technologies like enzymatic cleaners that deliver better faster cleaning outcomes for customers and a more attractive growth and margin profile for ecolab as we innovate to provide alternatives to volatile raw materials like caustic and we're leveraging this new innovation with digital solutions like ecolab cip iq which provides real-time proof of clean and combined with our leading water technologies the food and beverage business brings a one equal lab integrated water and hygiene program to customers to drive that best-in-class performance at customer locations and as a result food and beverage continues to grow well ahead of its end markets we expect growth for food and beverage to accelerate to six to eight percent in 2026 again with strong and expanding margins beyond our core businesses our growth engines are an increasingly important part of our story Pest, life sciences, digital, global high-tech represent about a quarter of the company today and are growing faster than the enterprise with margins accretive to Ecolab. We're investing in each of them with purpose both organically and inorganically. In Pest, we're performing within our long-term sales target and have a long runway as we scale our pest intelligence platform, which fundamentally changes how the service model works. today 95% of our time is spent checking empty traps with pest intelligence we flip that spending 95% of our time solving customer problems will know exactly where the pest activity is happening and focus service where it counts the most for customers we're able to deliver nearly 90% pest free locations versus an industry average in the low 90s this creates a significantly better experience for our customers while reducing the high cost and brand damage with large-scale pest issues. This means more value for our customers and more growth and higher margins for Ecolab. Life science follows a similar pattern. Through one Ecolab we're bringing together drug purification technologies, cleaning and sanitation solutions, digital and water purification. This unique solution set allows our customers produce the highest quality drugs at the lowest total cost. We have been investing in this large and expanding market, and you're seeing that show up in strong performance. Organic sales are growing double digits, with our biopharma business doubling its sales in the first quarter. Growth for life science is expected to further accelerate during 2026, driving strong double digit OI growth on our path to our 2030% OI margin target. And as we leverage significant business investments we've made in this business, this will drive high growth and continued high margins in this business on the path to 30% OI margin. AI is an important part of the Ecolab growth strategy with our global high-tech business that spans fabs and data centers. As you've probably heard AI demand is reshaping digital infrastructure and AI compute is expected to roughly double over the next three or four years. Industry plans call for about 50 gigawatts of incremental compute demand. That's driving roughly 70 new fabs and a thousand new data centers over the next few years. For us that represents a 10 billion opportunity for our global high tech business that's already growing extremely fast with accretive margins to Ecolab, and as the world's water technology and services company, we are well positioned to capture this high growth, high margin opportunity. Water sits at the critical step, every critical step of AI. You need ultra-pure water to produce the chips, you need water to generate the electricity that powers those chips, and you need water to cool the chips in data centers. On the microelectronics side, we partner with FABs to deliver ultra-pure water and water circularity programs, strengthened by our recent Avivo acquisition, allowing customers to produce more chips with less water. In data centers, we combine Ecolab's water treatment, cooling liquids, 3D Tracer monitoring, and our latest cooling-as-a-service offering with CoolIT's direct-to-chip liquid cooling technologies. and together we'll deliver more computing with less cooling through a single integrated direct to chip model that improves reliability, efficiency, and uptime. So together with Ovevo and our pending acquisition of CoolIT, Global High Tech will be our largest and fastest growing growth engine. With 1.5 billion in sales, the business is growing above 20% in a large and rapidly growing market. The business meaningfully accelerates our growth algorithm. Global High tech alone will accelerate sales growth by 200 basis points with a very attractive margin profile. Putting this all together we see a clear pathway to accelerate Ecolab's organic sales from the three to four percent last year to five to six percent in 2026 and five to seven percent in next year. Within this we expect our core businesses to contribute three to four percent to our total growth and for our growth engines to add another two to three percent growth. Our stronger top line trajectory helps to further expand our operating margins. Within our portfolio, about two-thirds of our businesses are already at or above our 2027 OI margin target of 20%. A third of our businesses are below the 20%, including life sciences and global high-tech. Two businesses where we're investing for the future and underlying operating margins are already north of 20%. We've been delivering strong margin expansion for a long time, with OI margins up 600 basis points since 2022 we exited 2025 with a record 18 oi income margin with value pricing well ahead of dpc inflation accelerating growth engines and one equal lab enabled productivity we're confident in reaching our 20 oi margin target by 2027 but 20 is not the destination beyond 2027 we're targeting 100 to 150 basis points of annual oi and margin accretion through 2030. all of this is guided by our discipline financial framework I referenced before. Strong organic sales growth and continuing to deliver adjusted EPS growth of 12 to 15 percent. A strong cash generation model targeting free cash flow conversion of 90 to 100 percent which supports rapidly deleveraging and strong liquidity. We'll continue to focus on our fortress balance sheet with discipline capital allocation providing us the financial flexibility to invest through the cycle. And that discipline translates directly into strong shareholder returns. Over the past decade, we've returned more than $10 billion to shareholders and increased our dividends for more than three decades. Ecolab is a high-quality compounder with a durable recurring cash flow, established market leadership, and accelerated growth driven by AI infrastructure. We expect gross margins to stabilize as we exit Q2. Our core businesses are outperforming and expanding their margins, and our growth engines are compounding at double-digit rates with margins accretive to the company. All of this reinforces our confidence in delivering strong financial performance in 2026 and well beyond. Thank you for listening. Yeah, thanks, Scott. That was a

Tim Mulrooney, Analyst — William Blair

great overview. There's a lot to be excited about here, and we got about 20 or 10 minutes left before we go to the breakout. By the way, the breakout room is in the Adler room for those that are interested in exploring some of these topics in more detail I'm gonna ask a couple questions and and then I can open it up to y'all but I want to start it out with the guide I think that's new news today so you raised it you know you were looking for EPS growth of seven seven to twelve and you raised the low end to 9 to 12 can you just talk about what drove that increase

Scott Kirkland, CFO

specifically yeah good question so as we exited q1 and we talked about q2 is this transition quarter that we are launching our energy surcharge with the wrong raw material inflation not understanding exactly how that pacing would be but feeling very confident about the second half but the pacing in in the second quarter was hard to predict. But now as we're more than 50% through the second quarter and have very good visibility, have great confidence in that delivery, and that's why we changed the original guidance from this seven to 12 to the nine to 12 and brought up the bottom of the range.

Tim Mulrooney, Analyst — William Blair

Got it. So it was execution on the energy surcharge is going better than expected? I wouldn't say better than expected, right?

Scott Kirkland, CFO

It's certainly within our range,

Tim Mulrooney, Analyst — William Blair

but it's just given us going well it's going very well it's not because some geography is doing better than you thought or some business is performing better than you well hey all of the

Scott Kirkland, CFO

businesses are continuing to perform very well right as we exited q1 business is performing well that's continuing and then on top of that also executing as you said very well in the energy surcharge and that's going very well giving us the confidence to both say the minimum on sales is that four percent and so we feel that it's the bottom on sales but also that the bottom and the The EPS range is now nine, so that nine to 12. So just great confidence given execution and visibility we have into the second quarter. But also that confidence now as we exit the second quarter that this underlying, excluding the impact of CoolIT once it closes, but excluding CoolIT that the second half EPS will be this 14 to 15 percent and top line is six to seven, inclusive of five to six percent of pricing because of the energy surcharge implementation and the path we're seeing in Q2.

Tim Mulrooney, Analyst — William Blair

That's six to seven percent organic growth. growth is for the second half of this year and I think that might be a little bit higher than my model. I'll have to go back to check but it seems like all is going according to plan which is why Kristoff said on the first quarter call by the way like this isn't where his focus is right like he's focused you know he's obviously focused but he's like this isn't where he's this isn't his

Scott Kirkland, CFO

highest priority because of the confidence that we have and we've seen this movie of four right so four years ago we had a surcharge in the second quarter and learned a lot from it executed really well and exited that cycle as you recall with higher margins we've had record margins at 18% in the last year and showed great discipline and execution be able to do this and build strong muscles from four years ago that we're

Tim Mulrooney, Analyst — William Blair

flexing even now yeah okay so this time is different in fact um yes as you think

Scott Kirkland, CFO

about the quarters because we're talking about the organic gross margin excluding the impact of o vivo because there's some pnl geography from that so So the organic gross margin, we expect to be up 75 basis points in the second half. So we're doing what used to take us a few quarters and doing that basically in one quarter.

Tim Mulrooney, Analyst — William Blair

I remember Mike Monahan would be coming to these conferences when there'd be a dislocation or a surge in energy costs. The old saying was, it takes four quarters to build back the gross profit dollars and then four more quarters to build back the margin. you are in essence building back all of the dollars in one quarter and your margin will be expanding in the second half of this year correct so you've

Scott Kirkland, CFO

compressed cycle we've taken the the approach to TVD the muscle that we built four years ago and and made that an operational discipline and created a scale and efficiency in doing that and efficacy because we better understand the value that we deliver more than ever and we're able to get that pricing

Tim Mulrooney, Analyst — William Blair

and prove that value to customers got it okay the only other question that I wanted to ask before I open it up is really around cool IT because the headline number on cool IT is that you spent 29 times EBITDA to acquire this company but I also note that you implied in that next 12 months outlook was 30 percent growth and please correct me if I'm wrong on any of this well and we

Scott Kirkland, CFO

said 30% and that was over the the first three four or five years right and so the early years would be higher just obviously given the the law of small numbers and so we said 30% over the the first few years and so that's a CAGR obviously in the first year we expect that to grow faster okay because that

Tim Mulrooney, Analyst — William Blair

was basically my question is I think it grew over a hundred percent in the first quarter is it growing faster than what you expected when you first started

Scott Kirkland, CFO

diligencing this thing um it's doing really well we don't own it yet so i'm always cautious with assets yet known and we only have limited visibility but it is doing very well and so we're always very disciplined about our approach to um investing both organically and organically and i think we always take a prudent view of it uh of these deals and so it is performing very well from everything we can see and as we talked about in the first quarter yeah it basically grew 100 percent so it's going to grow much faster than the 30 percent but that was a over the next four or five year timeline and so this year and into next year which is the reason we've talked about this 200 basis points combined from a vivo and cool it that they're going to add on a pro forma basis if you will but once that annualizes that will provide a 200 basis point benefit to our top line which is why we see this as i said this very clear path from this historical three to four percent and how do we get to that five to seven and that is going to be driven by our growth engines certainly in the short term we're going to benefit from the energy surcharge but even as that energy surcharge annualizes in the first half of next year we see that path to that that five to seven because of the benefit of the growth engines including cool IT so it

Tim Mulrooney, Analyst — William Blair

would be the growth algorithm for next year would look a little bit differently as you break it down between price and volume yes I think so I think there will

Scott Kirkland, CFO

probably more price in the first half naturally because you'll see the right now where there's two to three percent pricing in the in the first quarter right that's accelerating and we're expecting pricing total including the surcharge excuse me of five to six percent in the second half so you'll have some natural annualization in the first half yep but then that and resolution will then that'll happen the first half as the cool IT deal hopefully annualize this as well and then you'll see the organic including the benefit from cool IT in the second half got it okay thank you that's very

Tim Mulrooney, Analyst — William Blair

clear I appreciate that but obviously the reported the reported number will be

Scott Kirkland, CFO

even better because it'll include both the benefit from the accelerate the higher pricing and the benefit from cool IT on a reported sales basis so I'm

Tim Mulrooney, Analyst — William Blair

talking organic okay yeah got it on the organic basis okay a couple minutes left if we have any questions in the in the crowd for Scott otherwise we can wrap it up early but any questions burning questions okay I think we'll leave it oh yep we got one over here sir and would you repeat the question just because I

Scott Kirkland, CFO

think this is being yeah there was a question on how moratoriums in certain states and data centers may affect the growth of cool IT well the growth of cool IT is going to be correlated to what's happening from a chip perspective as much as it is from a capex perspective and I don't think what's happening in the data center build out whether and our data center slows is going to slow down the innovation happening from an AI perspective and the chips being designed for AI and and because that will change the cooling needs whether it's from the cold plates or the CDU's that's where the growth from cool IT is going to happen so we believe their growth is going to continue and we don't have concerns around that growth because of what's happening in the AI

Tim Mulrooney, Analyst — William Blair

and the chip space okay thank you all and we'll see you in the Adler room Thank you, Scott. Thank you.