Q3 2022 Ecolab Inc Earnings Call
[music].
Yeah.
Greetings and welcome to the Ecolab third quarter 2022 earnings release Conference call.
At this time, all participants will be in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Andy Hedberg, Vice President of Investor Relations.
You may now begin thank.
Thank you Hello, everyone and welcome to <unk> third quarter Conference call with me today are Christophe Beck, Ecolab is chairman and CEO and Scott Kirkland, our CFO a discussion of our results along with our earnings release and slides referencing the quarter's results are available on <unk> website at Ecolab Dot Com Slash investor. Please take a moment to read the cautionary statements in these materials.
Which state that this teleconference and associated supplemental materials include estimates of future performance. These are forward looking statements and actual results could differ materially from those projected factors that could cause actual results to differ are described under the risk factors section in our most recent Form 10-K and in our posted materials. We refer you to the supplemental diluted.
Per share information in the release with that I would like to turn the call over to Christophe Beck for his comments.
Thank you Andy and welcome to everyone in Q3 or it team delivered another strong quarter with steady double digit organic sales growth of 13% and total pricing that's accelerated from 9% in the second quarter to 12% in the third.
Industrial grew 16% organic with 15% of pricing and institutional and specialty grew 12% organic 10% pricing is market study lives. The other segment led by pest elimination continued on a strong trajectory with 13% organic and 7% pricing in healthcare and life Sciences with year.
Over year comparisons finally, stabilizing and with life Sciences, clearly need it most.
Most importantly, accelerating pricing exceeded continued substantial delivered product cost inflation with the net benefit expanding significantly since the end of the second quarter, which helped further eased year over year gross margin pressure. This along with increased productivity gains led to renewed positive growth in fixed currency operating income was <unk>.
<unk> gains in the industrial institutional and other segments all in all it cleared in further step on our journey to fully recover our margins and get back to strong and steady earnings growth.
With this clear commitment to continuously improve earnings performance quarter. After quarter, we have been preparing for an environment, where inflation will remain high for longer and interest rates will impact demand.
This is especially true in Europe , where the war and the energy crisis are impacting demand and global energy costs. In my view. This is just the beginning with inflation in Europe at 11% as of yesterday and natural gas price is 60% higher than a year ago, which is the equivalent to $180 per barrel.
Oil today with future pointing towards 230 by the end of this year.
More importantly, we're taking early action.
As we take a realistic view of what's ahead and we continue to expect earnings growth to progressively improve but at a more moderate pace than previously anticipated coming out of Q2.
Over the past few years Europe has become a very strong successful and critical market for ecolab with steady growth profit margin improvement and the right team to strengthen our market leadership positions.
We therefore entering this European winter with confidence confidence not built on a hope, but then momentum actions and exceptional execution led by a great team.
In a unique situation to accelerate our performance improvements as we've launched a new initiative that will lead to $80 million of annual savings when fully implemented helping to partially mitigate the negative impact towards short term and improved longer term performance.
This along with accelerating pricing new business and productivity gains is expected to deliver a strong acceleration in operating income growth.
The sequentially improving operating performance is expected to be offset by unfavorable impact from currency translation and interest expense, resulting in fourth quarter adjusted diluted earnings per share approaching last year's 128 now.
Now more broadly and with pricing and productivity work showing strong continued momentum and now fully in execution mode. We've clearly shifted our primary focus too often.
We've accelerated new business generation to gain more share with sharpen our attention on customer value creation to improve the total operating cost and importantly, protect our pricing in the long run.
We've increased our investments in select brazing breakthrough innovation to help customers save more water energy and cost when they needed the most especially in Europe , and we are prepared to accelerate <unk> growth with new capacity coming online as we speak.
This will help us unlock our large order backlog.
And expand proprietary technologies across high growth high margin end markets in life Sciences nuclear power microelectronics, and lithium extraction for EV batteries being back on offense, while staying on price execution and productivity is good for ecolab.
It is where we are at our best and what we love doing most.
Looking ahead, we do not expect the global environment to improve anytime soon but it is in times like these that our growth model demonstrates its strongest resilience and our customers need us. The most we will therefore remain laser focused on exceptional execution to enter next year in a position of strength.
With strong double digit organic sales growth total pricing getting further ahead of inflation and productivity work mitigating the impact of the energy crisis in the war in Europe , We now in a position to deliver earnings growth at progressively aligns with our strong historical double digit growth performance and this to me personally remains Michael.
Our objective.
We have all it takes to win short term and long term, our 152 billion total available markets keep getting bigger with customers increasingly needing a solution to reduce their total operating costs and water and energy usage, our pricing and productivity work provides us with a firm runway to recapture over historical a wide margin and drive towards our long term 20.
Percent Oi margin objective has been to drive significant earnings power as inflation, eventually eases and Overvalue delivered keeps rising.
And our leadership team now together with a real Brown as Chief operating officer, and my trusted partner has never been stronger and this is why I'm more confident than ever about our future.
<unk> to deliver superior long term performance of our customers and our shareholders I look forward to your questions.
Thanks Christoph This concludes our formal remarks, operator would you. Please begin the question and answer period.
Thank you.
And answer period will now begin we ask you. Please limit yourself to one question and one brief follow up question per caller, so that others will have a chance to participate.
If you'd like to ask a question at this time. Please press star one from your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Let me first start to move.
A question from the queue.
Proficient at using speaker equipment may be necessary to pick up your handset before pressing the star keys.
One moment. Please so we poll for questions.
Thank you and our first question is from the line of Manav Patnaik with Barclays. Please proceed with your questions.
Thank you Christoph.
Christophe will qualify.
<unk> progressively improving towards double digit EPS growth I was hoping elaborate more MLB headwinds are not common.
On the margin I guess European sites at the moment or are you anticipating like God of war.
Global recession.
Good question Manav. Thank you, it's mostly Europe , but it's also the macro view.
And thats, our assumption, which might be OLED realistic if I may say that inflation is going to stay high.
In 2023 that the dollar will remain strong as well interest rates, so Mike impact demand as well at some point, but most importantly to your point that Europe is going to have a tough winter. So we've been improving our performance quarter to quarter from Q2 to Q3, you're expecting the same as well so for Q4.
And leading towards the double digit historical growth that we've had in the past as well sometime in 2023 that we can have really saw an improvement that steady quarter after quarter, mostly driven by steady growth, which has been so really strong over the past few quarters and will remain as such and pricing that's going to.
Keep to strengthen as well over the quarters to come as inflation, hopefully stabilizes and goes down at some point.
Thank you.
The next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.
Yeah.
Hey, Chris Thanks for taking.
My question I.
I know there is concerns about softening Europe , and FX headwinds, but based on our math it still seems like the number one determinant for EPS growth is still around gross margins. So my question is assuming no more significant spikes in raw materials and based on what you expect for pricing when would you expect gross margins to begin.
To expand year over a year is that most likely sometime in the second half of 2023 any directional guidance would be helpful.
Yes. Thank you Tim so with the assumption, obviously that inflation remains high.
For 2023 as mentioned before that the dollar remains strong as well and that's Europe , So I'll get through each winter as well I would expect gross margin to expect to expand in the second half of 2023 and improving from now.
Dan If you look at general margins, so for the company as well and it's important to note that as well so between Q2 and Q3.
Margin pressure has been easing as well so we had 200.
70 points down in Q2, we had 180 in Q3 and most importantly, if you look at the industrial which is an interesting bellwether.
Where you have two third.
Inflation pressure, if I may say well they improved from 340 down in Q2 to 130 <unk>.
In Q3, Q3, and we will keep improving in the quarters as well to come in if you look back in 2020.
Industrial which went through a similar cycle not that extreme had great oi improvements as well. So during 2020, that's a good indication of what's going to happen in 'twenty, three and what's going to happen across our businesses as well.
Thank you.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you Christophe and healthcare margins are a little bit lower than we expected anything driving that.
Downturn in margins you saw in Q3 and health care.
Thanks, David healthcare.
<unk> has reached the low point in Q3, and now we could see so the trends coming back up.
Whereas surgeries are starting to get back to normal levels, we could build that over the past couple of months.
Inventories as well of Covid related products are kind of melting which is good as well and most importantly, so pricing moved from 3% in the second quarter to 6% as well in the third quarter, and we keep improving as well.
In the quarter to come so I think we're turning the corner with the lowest quarter.
In the third quarter in healthcare, but let me be clear as I have always been.
Don't like the performance of that business, that's been true for quite a while as well.
Absolutely committed so to resolve it.
Over the quarters to come in 'twenty, three is going to be a transformational year for healthcare in many ways.
And just like cost side.
In 2023, why not assume more.
More cost relief overall in your businesses if demand is lower globally.
Youre talking about health care overall.
I believe youre, assuming that cost hold in there next year, despite some lower demand why not.
Why wouldn't costs be lower next year demand has softened.
I believe.
Hey, it's a good question David So, we're taking probably an overly realistic view, but it's basically saying that the high delivered product cost that we have today, we remain for 2023.
Which is why when we can improve our gross margins and operating margins as well, which by the way a turned positive as well.
In the third quarter, it's already a remarkable achievement.
If like other things.
Inflation is going to ease and go down during 2023.
Our margin leverage will improve dramatically as it always does but I'm not counting on that for now.
Thank you very much.
Thank you David.
The next question is from the line of Seth Weber with Wells Fargo. Please proceed with your questions.
Hi, good afternoon, everybody. Thanks for taking my question I guess I want I was hoping just to drill down a little bit more on the institutional business.
Whether you've seen any kind of whether you saw any deterioration kind of through the quarter. Just in response to the highest price increases whether that's starting to have any impact on customer demand.
I guess I'm, just trying to understand what's happening more specifically in the institutional business and then just any specific color on Europe institutional that you could share. Thank you.
Yes. Thank you Seth actually we are not seeing.
And easing of demand, which is good and institutional honestly I was hoping to see even more recovery as well so in that market.
Which is kind of not really happening as fast as many were expecting as well. So when we look at the growth we have in institutional.
All self made today.
We are ahead of pre Covid levels, which is quite remarkable when you think that just a comparison point that in the U S. The dine in traffic. So people sitting in a restaurant is down close to 30% versus pre COVID-19 levels as well and our sales are ahead of 2019. So.
I like the growth that we have we don't see.
Softening of the demand certainly not because of pricing which is good.
By the way as well in institutional so so far so good.
But we'll need to drive even more.
<unk> through new business penetration innovation.
And as well so keeping in mind that.
This industry, so we'll be facing even more labor challenges going forward, especially on the cost side, but also food costs and energy costs are going to go up so what we're doing for customers exactly what they need and will need even more in the quarters to come which is reducing debt.
While serving their guests the best possible way so.
So does it give with institutional like where theyre going and I think we're going to see good things, but at the same time I will just conclude on one point. We know it's an industry that is in quite some big transformation, which I take that as an opportunity and we will keep transforming our own business as well to adapt to what our customers need the most.
That's helpful. Thank you and then maybe just a quick follow up on the.
On the purely.
Capacity adds can you just frame for us.
The pace of that and just the order of magnitude that you are looking at purely.
Surely capacity additions for this year and next year, yes.
Great question, so different topic, obviously on pure light as I mentioned as well all along so we are building capacity expansion.
And it's coming online as we speak.
In the U S and in Europe , so on both continents.
We had planned as well so in 2022, it took us one more quarter to.
To get to that right place each release or to do it well do it the ecolab way as well and we've been obviously saw squeezing that business because supply was limited. So we could not obviously supply more than what the plant could produce as well at the same time, so when I look at <unk>. So Q.
<unk> is going to be a very good quarter.
Pure light, we have almost all orders billing the whole quarter, So theres no big risk.
In that quarter and for 2023.
If we're going to like Q4, I think we are going to love 2023 with that business.
Thank you very much appreciate it thank you.
Our next question is from the line of John Roberts with Credit Suisse. Please proceed with your questions.
Thank you in your December quarter guidance, what areas do you expect to be down in volume year over year or sequentially.
We are not expecting.
Much softening.
John sorry.
In the fourth quarter.
We are expecting that in Europe thinks would be better which would ultimately so help us get even better in terms of volume that's not going to happen I might be.
Overly realistic.
In Europe , but I think that the war in Europe .
<unk> is well on energy cost on all European economies as well over there is going to have a major impact I hope I'm wrong, but thats going to be so.
The Bulls eye of.
The volume challenge, but overall, we're going to keep steady double digit growth as a company and volume will remain quite stable as.
Well so versus what we've seen in Q3.
Okay.
Barry is variable debt a priority to pay down or do you plan to keep a portion of your debt variable since interest rates are hard to forecast.
Let me give that question to Scott.
Hey, John Scott here, Yeah, we've got about 25% of the debt is floating right now and so certainly with the way rates are going we will expect some upward pressure on interest as a result, but not looking to pay off any debt in the near term future and making sure that we have optionality as we look forward and certainly we.
Have some debt coming due at the end of next year and so we will opportunistically look at that based on sort of status of the market.
Thank you.
The next question is coming from the line of Josh Spector with UBS. Please proceed with your question.
Yes, hi, thanks for taking my question.
Now that you have a couple of quarters under your belt with the surcharges in place just wondering if you could comment generally working as planned and as oil has moved down and gas has been a really variable. How good is that had been had been matching that variability versus what you've seen.
Yeah.
Hi, Josh its worked really well actually we didn't know how we would be working when we started with the energy surcharge on April one we have never done that as a company. So let alone on a global basis all businesses all at the same time.
It worked out really well.
Some of the learnings for us some customers have preferred having it directly.
<unk> pricing because it was easier for them to handle that so from a system perspective, as well and others chose the energy surcharge as a valuable part.
Well to it but it is covered very nicely. So dollar for dollar with what we were expecting and most importantly, it's a tool that we can use.
So going forward.
Whatever could happen like natural gas in Europe , it's been highly variable as <unk>.
<unk> seen on the lower side right now is still 60% higher than a year ago. It could dabbled very easily over the next few months, having such a tool that we can engage very rapidly is going to be a huge advantage for us and our teams.
So I guess to follow up if that's worked well and I mean, correct me if I'm wrong, but in answer to the prior question you talked about not really a significant amount of additional volume weakness you're talking about additional pricing trying to go after new wins why wouldn't earnings be up sequentially.
So the short answer here, Josh is looking at the operating income so in Q3, each turn positive for the first time since the wall started.
In Europe , which is a good sign it's going to keep improving very nicely as well in the fourth quarter and going forward in 'twenty. Three then you get the FX impact, which is something I mentioned as well in the previous quarter that impacted us down so for the third quarter. That's the core of the story.
Okay. Thank you.
Our next question is from the line of Christopher Parkinson with Mizuho. Please proceed with your question.
Hey, Chris ill circle back to this.
Two quick comments on global Health care, and then pure light on health care can you just give us a real quick update on the U S side.
For elective surgeries and what that means for your outlook for 2023 and on the life Sciences side.
Do you feel that the growth.
<unk> growth expansion opportunities pure light is well understood and our margins in that business.
Where you are anticipating or should we anticipate startup cautious any additional framework you could help us out there would be greatly appreciate it. Thank you.
Yes. Thank you Chris So a few questions so beazley.
So starting with pure light.
I'm looking at next year exactly as expected.
The second year of the pure light.
Acquisition.
Promising we are going to love what we see in 2023 was hard in 'twenty, two obviously to get everything lined up to get the integration really well done.
The capacity as well online with everything to Ecolab way, we at that stage now and Thats why I see the unlock in Q4, so happening very nicely in 2023, so being as good as we sold and potentially saw even better. So very good story. This is true for Biopharma and this is.
Specially truth flower.
Our industrial applications as well.
As mentioned in my opening.
In nuclear power in microelectronics and in lithium extraction as well ultimately more demand than we ever thought as well so from that end of the business So pure light.
Heading in a very very good direction life Sciences.
Your second question.
<unk> is in a good place.
You'll see as well in Q4 getting back to usual trajectory and getting back in 2023 with double digit topline and bottom line growth So life science in it.
Very good place, it's always been it's been the past few years. The comparison year on year have been a little bit complicated, sometimes but underlying.
No change extremely.
Steady and then your last point on health.
Healthcare.
It's in the works.
One as mentioned.
Happy with the performance of that business I haven't been happy for a very long time.
By the way and I see Q3 is the low point for that business improving sequentially in the quarters to come but I wanted to be perfectly honest in Europe . It's a radical change that's expected in that business. The old way of running that business is not going to work with me so going forward.
You have my commitment that we're going to address it one way or another.
Very helpful. Thank you.
Thank you.
Our next question comes from the line of John Mcnulty with BMO capital markets. Please proceed with your question, yes. Thanks for taking my question Chris So.
The first one would just be on delivered costs can you help us to understand how much. They went up in <unk> versus <unk> and maybe give us some color around the baskets bigger baskets, whether it's transportation labor or raw materials.
Yeah. Thank you John it was roughly.
The same type of pressure in Q3 versus Q2, which is 30%.
Year over year, and since we had 10% last year, it's a 40% delivered product cost increase.
Two years. So if you want accounts so the overall inflation, so which is quite a bit to say the least to your question on the on the basket.
It is evolving.
Oil price, so easing a bit natural gas went up during the quarter and he's a bit towards the end of the quarter and then you have caustic.
Food and beverage and institutional that's going up in a big way as well at the same time, but overall kind of the same in Q3 versus what we saw in Q2 and Thats why.
I'm quite proud of what the team has delivered over the last five quarters. So Q2 last year when inflation started to go up while the team has overcome or a billion dollar of incremental cost with pricing that's going to stick for the future, which is good short term, but it is especially good for the long term because.
We will be protecting that pricing going forward.
Got it okay.
And then I guess you mentioned in your opening comments that when you look to 2023 with the help of pricing you expect to see double digit topline growth. Just when you think about the price catching up to raw materials et cetera does that does that mean that you have double digit EPS growth in the cards as well or is that still a little.
A question Mark.
It will happen so doing 23 during the second half so most probably what's most important to me is making sure that pricing gets way ahead.
Delivered product cost and we've done that quarter after quarter second is making sure that our operating income so it keeps growing it's been growing.
In the third quarter, which is a good sign it will be growing even more.
The fourth quarter, and it's going to keep growing as well in the in the quarters to come in 2023, then you have the impact on FX and interest obviously, that's mitigating that.
See how it all plays out in 2023, but as long as I have business momentum strong that I have pricing getting way ahead of delivered product cost and that we have productivity saw in a positive direction as it is today as well what it is going to lead to operating income growth, that's ultimately going to lead to EPS growth as well.
Sometimes in the second half of next year.
Great. Thanks, very much for the color.
Thank you John .
The next question comes from the line of Jeff Zekauskas with Jpmorgan. Please proceed with your question.
Alright, thanks very much.
On slide 12 up your tech and you say that.
Your delivered product cost inflation was 30%.
But your SG&A is only up.
I don't know of 14%.
Product and equipment cost of goods sold to supplement that faster than that can you reconcile those numbers.
How do we go from 30% to <unk>.
<unk> thousand 14%.
So 30%.
While this is the increase of the PC as I mentioned as well before which is very similar to what we're heading in the second quarter, but yes, G&A, which is not obviously in our delivered product costs went up 14% its mostly labor cost.
That we have in there we don't have.
More people in the third quarter, so versus the second quarter as well, which is important so that's why SG&A productivity. Ultimately so is improving as well and one point I should have mentioned is what SG&A.
We have also commissions.
While we are salespeople and with much higher pricing again, how your commission that ends up.
Well.
Our SG&A I hope that helps.
In looking at different chemical companies.
If you look at the petrochemical companies I think that.
Utilization rates for those companies maybe have gone from the mid <unk> to low seventeens.
And if you look across many industrial areas, what youre seeing is tremendous.
Liquidation of inventories.
I'm surprised that your industrial business isn't feeling any of that for the fourth quarter, because I would think your customers would be operating at much lower levels of utilization.
And water treatment chemicals should be a function of utilization is there some other factor going on.
You're totally right so.
So if we look at Europe .
Same store sale.
Demand.
From one site same applications from industrial we see softening of that part of the demand. So if we see industrial doing so well.
And especially in places like in downstream as well, which was north of 20%. While it is driven by new business. It is driven by increased penetration new solutions for.
For those same sites as well its innovation and its pricing, obviously, which is going up so quite significantly so you're absolutely right. We saw similar demand for one site is easing and we feeling that and we compensate itself with new business and Thats why the.
The new approach on offense as I mentioned in the previous call as well is so important because we will have to face those potential headwinds as well.
Okay, great. Thank you so much thank.
Thank you Jeff.
Our next question is from the line of Ashish <unk> with RBC capital markets. Please proceed with your questions.
Thanks for taking my question first off I, just wanted to circle back with the comment that you made in the first half versus second half earnings growth about double digit earnings within the second half I was just wondering even in the first half we should see earnings growth rate, maybe not in the double digit range and I was wondering if you could.
Elaborate further and see like with these combination of first towards the second half could we still get to a double digit earnings growth for the full year I think 23 any color would be helpful. Thanks.
I appreciate it's very early we usually saw never talk about next year before the publication of our results of the fourth quarter in February .
But I chose intentionally so to share with you early enough what we see and things are going to evolve obviously in the next three or four months until we get back together, but it's really so trying to share with you.
We are seeing what we are assuming and our assumptions are really saw inflation stays more or less the same level.
The whole next year that the dollar remains strong as well so for most of the year as well in 2023 same with the interest rate and with Europe getting tougher as well so in the in the months to come how it's going to play out exactly.
I don't know yet and I don't think that anyone knows but when I know that we're going to maintain our strong momentum top line volume and pricing. So together that we will keep expanding pricing as well as we've done it quarter after quarter over the past four five quarter as well.
And that we're going to get some upside from the European programs that have announced as well while I can feel.
<unk> confident that quarter after quarter, we're going to improve as we've done in Q2 to Q3, it's going to be Q3 to Q4, and we're going to keep going that path as well in 2023 heading towards these double digit that I mentioned saw in the second half sometime in the second half of 'twenty three.
That's very helpful color. Thanks, Thanks Kristen.
Thank you Ashish.
Our next question is from the line of Shlomo Rosenbaum with Stifel. Please proceed with your questions.
Hi, Thank you for taking my questions, Hey, Christophe the volume growth was 1% across the company which is.
Consider that a little bit low for coming still comping off of Covid comps still.
Still a potential for some opening I was wondering if you could break out the volume growth along the different segments, how much of that had to do with the inventory stuff going on in healthcare that you'd have to go through and maybe just give us a little bit of color on that and then I'll have a follow up.
The biggest element on volume evolution is the year on year comparison.
You compare which is something that we usually don't talk too openly but versus 2019, which was kind of a stable base.
Pre COVID-19.
Influence over the past three years.
It's very steady sort of volume trends that we have right now in most of our businesses.
Continuing the same way as they did in Q2 in Q3, and probably will as well in Q4 with that impact from Europe , as Ive mentioned before as well and to your point of the recovery.
The institutional.
With the recovery.
I was kind of plateaued on the market in Europe . So the number of restaurants hotels available as well out there. So is remaining so quite flat since the beginning of each year as well I mentioned early on as well.
The traffic.
CDP in.
In restaurants.
Is down almost 30% versus 2019, so basically in that industry in a steady state where there is not further recovery. If you see sales going up from our customers, it's mostly driven by pricing, which has been a big deal obviously for them which means.
That for us.
To keep doing two things.
First one is to keep on offense, it's new business its penetration innovation, especially with customers need solutions in terms of reducing the total operating costs and improving the quality and second and last point is the market has changed.
I look at where we are today, where we're going to be in 2023, the market of hotels and restaurants.
Especially in the U S and in Europe and for that we will have to adjust as well over the months to come and I feel confident that the team is going to do it the right way, but the world. We live in now is probably the world that we're going to have in the years to come.
Okay, Great and then.
Next one maybe it's for Scott just some of the below the line items and how do you expect.
Or what do you expect I'm sorry.
Should we expect in the other income kind of after <unk> more of a normalized pension.
Income, what you've been getting somewhere around $19 million for the last three quarters is that fair or does something change with the.
With the change in the stock markets and then you had a $10 million sequential increase in interest expense do you feel like from where you are right. Now. This is a relatively it should be relatively close to this are you are you assuming that the interest expense is going to continue to step up a lot.
Yes, I guess I'll first talk on the pension so certainly for this year I would expect sort of a <unk>.
Other income to be pretty.
Similar to Q3 to Q4, but as we go into next year as you think about the impact on rates there will be increasing headwinds on pensions as we go into 2023, it's too early to talk specifics, but we will expect that.
Pension expense to increase and then in addition, as we talked to interest.
Interest expense was about call it a quarter of our debt being variable rate and just given where rate hikes have continued to decline I would expect that to continue to be headway.
Headwind it will increase in Q4 and similar to pension be a bigger headwind next year.
Thank you.
Next question is from the line of Mike Harrison with Seaport Global.
Research partners. Please ask your question.
Hi, good afternoon.
Good afternoon, I was hoping.
I was hoping that you could talk a little more.
More general.
Terms about the industrial business and then as you think about recessionary conditions, whether youre talking specifically about Europe or about a broader global slowdown.
It seems like some of your markets hold up better than others within industrial.
Talk a little bit about some of the pockets where youre seeing.
Some weaker or concerning demand trends as you look into Q4 and what are some of the areas that are holding it better within the industrial business.
Yeah.
Mike Industrial has been a great story for many many years and when we say industrial it's mostly driven by water, which is becoming something thats, even more essential for our customers. So going forward because of water scarcity, but most importantly, because water drives energy consumption, which drew.
<unk> cost and which drives as floods or the carbon footprint when I look across the various segments in industrial I think about it as a water is up 14% F&B is up 14% downstream is up 22% and paper is up 19%. So it's very healthy very steady.
Strong growth that we have in that in that whole group and it's driven.
Okay.
Market that likes what we're doing which is ultimately driving new business. It's a business. That's very strong innovation, it's a business that's strong in digital technology.
As well and Thats why pricing is still good as well.
With pricing that's been up 15% in the third quarter, and we had 12%.
In the second and we know that that business when you look at the margins.
Good to hear so have improved so dramatically.
From the second to the third of the margin pressure I should rather say saw 340 basis points in the second quarter down only 130 in the third quarter as well and we know in industrial so guests in the right momentum in terms of pricing and inflation ease is we know that great things happen both on the model.
In an earnings perspective, as well so yes as mentioned before Jeff.
<unk> that we feeling in some of the industries.
Petro Chem, so being one of them for the reasons mentioned as well early on which we mitigate so with new business, we spin iteration and innovation. So so far so good but let's see what happens in the months and quarters to come.
Alright, and then in terms of the cost program I was hoping you could give a little bit more detail.
Maybe the timing of those $80 million of benefits.
What segments should see the greatest proportion of benefits.
And I guess, what are the cash costs associated with that $80 million in savings. Thank you.
So it's all in Europe .
As you said.
I've been leading so that region. So it goes back.
Leading the turnaround over there is a very familiar with that story and I'm really proud with what the team has done you. Maybe remember are not 10 years ago, we had a large business over there that was not growing and that was not making money other than that it was a great place to be when I look at today well over the last.
<unk> growth has been so 4% from a <unk> perspective.
Our Oi has grown double digit over that time as well and we've moved from close to nothing in terms of profitability to north of 10% in 2021 as well. So a great story that we've had in Europe I want to make absolutely sure that we not only mitigate the shortage.
But most importantly, what we're doing is helping us for the long term that Europe's against stay on that successful journey. So to your question on where we're going to work to most.
Start with supply.
Security.
This is a big deal so far with customers so streamlining.
Our network, making sure that we can have the best.
Cost of delivered product.
Europe . So he is going to be the first priority the second one will be.
Structural cost as well.
SG&A leveraging as well so digital automation third will be.
In regional G&A as well leveraging all the work that we've done with the backbone.
Infrastructure over the past few years as well so it's really still kind of doing things. We would have done no matter what for the long term, but really saw accelerating these activities in order to get even more on the short term we would have done it in a more organic fashion in the years to come and have decided to do that.
In the months to come which is generating so this restructuring program as we've announced.
Our next question is from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Guys, It's Dan Rizzo on for Laurence Thanks for taking my questions. Just piggybacking on what was just said about the cost reduction program. I was wondering if there are other variable costs that you could temporarily take out if things were to get market get significantly worse in Europe .
You can do there.
We will absolutely so I've experienced Europe saw a fall off of my life. So very familiar with the Europe situation is quite deep streak with what's happening right now with the war on the Eastern front. It is having an impact on demand, it's having an impact on supply.
Especially software industrial businesses, and it's having an impact on cost as we know as I mentioned as well.
Open so.
Maybe in the camp are preparing for a pretty tough winter in Europe . I know many people are saying is pretty mild right. Now. We're just early November things can change quite a bit in the months to come and yes, we're thinking about some extreme scenarios as well.
And that includes all I've talked about before and for sure. All short term measure that we can take but everything we're doing in Europe and everything we will do is ultimately leading to better performance not only short term, but most importantly long term because that's an important region for us.
And then if we think about the <unk>.
With America or the rest of the world. So things are pretty okay, right now, but assuming that everybody is expecting that there is some sort of recession in the second half of next year.
Are you targeting or setting up cost programs that could be implemented there.
Obviously, it seems like a much more efficient and better margin region or elsewhere, but I was wondering if there's things there youre looking at if things get markedly worse.
Here in the U S.
It could be.
That's all a question of timing, we do think that we wouldn't have done over time think about digital automation think about ERP implementation.
About supply network as well, we have clear plans in order to continuously improve our productivity over the next few years, if things turn worse to your point before we would accelerate them and that could lead to some restructuring, but it's really because we would be extra rating our plans.
We had all along.
Alright, Thank you very much thank you.
Okay.
Our next question is from the line of Andy Wittman with Robert W. Baird. Please proceed with your questions.
Great. Thanks for taking my question I guess I, just wanted to understand a little bit more about.
The pricing and the expectations you have for pricing because it seems like a really important variable as we head into next year.
With the with the cost side seemingly evening out you'll certainly have a little bit of a tougher compare on the cost side in the first half, but it sounds like the second half compare on the on the cost side.
Your current expectations is materially worse I guess the question that comes to mind is.
Youre filtering through the price increases from the last quarter or two Christoph and Youre talking about focusing more on gaining share here.
Is that to say that there isn't another.
Unusually large price increase in store for your customers sometime in the middle of the.
The next two or three quarters to recover that or how should we be thinking about the next wave of price if any.
Yes, let me be very clear and so pricing is going to strengthen.
Especially in the next quarter in Q4, we're going to keep working on pricing as well in.
In 2023, and I'm going to get too much ahead of my skis here, but it's really making sure that we get the right pricing in order to rebuild our margins fully this is your objective for the team, but as we run a commercial organization, it's kind of.
Leading them towards what's the primary focus the last five quarters, it's been driving price and they've gotten over $1 billion over the last five quarters, while driving new business. So primary focus pricing secondary reprice focus new.
Business and now we've shifted that in the third quarter, where it's clearly so going for offense for all the reasons that we've discussed on that call being in Europe , the risk in the U S or elsewhere around the world.
To really go for new business to really go for penetration to really go for innovation.
While we keep strengthening the pricing and Thats why im saying its going to be higher in Q4 than it's been in the third quarter as well and at the same time, making sure that we can maintain most of these pricing as well in the long run because we provide incremental customer value as.
As well so over the quarters to come as we've always done in our history.
Got it could you talk a little bit about how the.
The pricing is affecting customer retention if at all in any parts of the business, where it's a bit better or worst received might be helpful information as well. Thanks.
So far it's been very good on our customer retention Hasnt changed.
Versus pre pricing times.
But customers are always price sensitive and Thats why we are taking time to do it really well.
We can't compare our business to a commodity company a chemical company, that's going up and down so with the markets as you know at Ecolab. So when we go up we don't go down the energy surcharges. The only variable that will have to manage the right way going forward, but the vast majority of our pricing is.
<unk> pricing and we do that with customers in ways that is good for them that we create value, which means we reduce the total operating cost that ultimately it's a good deal for them. It's a good deal for us as well and that we can keep it going forward, but thats real work and Thats why we Havent lost.
Customers more than we used to pre pricing of pre inflation as well and that we do it very carefully because we want to keep our customers for the long run.
Great. Thanks, a lot.
Thank you Andy.
The next question is from the line of Eric Petrie with Citi. Please proceed with your question.
Hi, Good afternoon Christophe good afternoon could you talk a little bit more about your climate intelligence offering.
Technology to Siemens bring to the table, how do you split value in and gain share with those industrial customers towards that net zero growth.
Yeah, Great question. So the simplest way to explain it is we experts at water management of water reduction and helping customers. So operate with less water zero water going forward.
Like component, which is the energy component, where Siemens is having strong expertise at it and when we say energy, that's mostly power as well so for our industrial customers and when we get together well, we have both expertise water reduction and.
Power energy reduction from Siemens and by bringing our offerings together, we can help our industrial customers to get both water reduction that's leading to power reduction and power reduction, that's leading as well so to carbon.
Cost reduction as well at the same time, so it's a joint offering its joint assistance that we bring together and its digital technology as well that we connect between the two companies for the good of our customers.
And then circling back to the pure light expansion, how much EBIT uplift do you expect on an annualized basis is at.
30% to $35 million is that in the ballpark.
Overall.
So we havent disclose that for obvious reasons.
It's going to give us enough capacity for the next two.
Two plus years.
We know is going to come so from the pipeline we have in the current demand backlog that we have right now and we are already working.
As we speak on what's required for beyond those two or three years as well so down the road because building plans. So it takes some time.
As well so it's going to be as expected so for 'twenty, three or even better and thats going to continue on the same trajectory you saw in 2024, and we are building the future as well so for the years to come.
Thank you.
The next question is from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your questions.
Good afternoon.
Christoph how would you compare and contrast, your price cost gap by region of the World I'm wondering where you've made the most progress and where you feel you have the most work to do.
Great question and the best is in North America.
We have the strongest team.
One market.
Well two countries the way we define it so with the U S and Canada.
Europe is the toughest because its always been the toughest complexity.
A region that's used to negotiate price.
As well, but with whom we have very good relationship because ultimately our value adds to help our customers reduce their total cost as well at the same time and then you have the rest of the world in between we would probably be China being the toughest place.
And then as a follow up.
I wanted to come back to your price contribution. So you had nice acceleration to 12% I think is the base case, you commented that that should improve in the fourth quarter can you help us in terms of understanding the contributions from based pricing versus the surcharges you mentioned them.
Volatility in Europe U S natural gas looks like it might actually come down sequentially and so I'm just trying to understand.
The moving parts there I'd also be curious.
Do you hear any thoughts that you might have on diesel we're hearing more about potential for shortages there.
Do you think you are well equipped to recover that through the surcharge paradigm if it happens.
So starting with the last part.
From a supply perspective, so we feel good about it so we practiced.
Resilience planning saw quite a while now from a cost perspective.
Diesel or other.
The fact that we had that surcharge allows us to react fairly quickly, which is very different obviously than structural price, which is an agreement for the long term together with our customers now in terms of structural price versus.
Energy surcharge.
As I've shared earlier, it's roughly two thirds structural one third energy surcharge, but knowing as well that the structural parts is growing as.
As well, which is good we want to make sure that as much of the pricing. So it can be structured for the long term backed by true value that we're creating for our customers as well and it's not the perfect line between structural and energy surcharge because some customers are not equipped to deal with an energy surcharge and they're saying so let's have that.
Directionally in my structural price, which we've accommodated for that.
But at the same time, but two third one third is a good proxy.
Thank you very much.
Okay.
The next question is from the line of Rosemarie <unk> with Gabelli funds. Please proceed with your question.
Thank you Hello, everyone.
But in upcoming digital stuff.
So it wasn't warranted.
So when we look at.
Institutional.
Get quiet well travel has been strong, which I am assuming also translates into hotels restaurants.
Yes.
Thats right.
Seeing some kind of a decline recently due to inflation.
Haven't seen any change yet.
We haven't seen anything yet, but there is no doubt that the cost pressure.
Are you starting to impact our customers not from us general costs.
<unk>.
Food of energy and especially on the labor side and Thats why what we do is becoming.
Increasingly importance for them, which is not new you're familiar with that Australia over the years.
The harder it gets for the institutional market the more they need us because ultimately they can reduce their total operating costs and especially now.
With the labor shortages and for US the biggest challenge that we've had.
With institutional is that.
The travel.
The guest traffic.
In general has been okay, but the service has gone down quite a bit.
Variants that are going to hotels, as well where service is quite way down or you need to do your room as well so yousaf, while that means less consumption of our products as well, which is why it's important for us to get new customer new penetration.
Innovation, but bottom line the demand has stayed reasonably stable around the world and across the end markets in institution.
Okay that is helpful. Thanks.
I was wondering you mentioned.
Yes.
Excuse me.
Thanks.
Can you.
Gives us a better feel for what.
So I'll make it a lot is the lithium industry using and then win because it is mostly.
Asia Pacific cannot yet.
So Europe .
Lithium has been.
The new opportunity that we didn't have.
On our radar screen.
Even before we acquired pure light and interestingly enough that pure light technology allows you to extract lithium from brine.
Salt water, there's only one line in the U S by the way of lithium today, which is in California, which we own.
Our solutions as well, which is a remarkable solutions for customers because you would go through the system and you can extract lithium at pretty low cost and low energy and low waste as well at the same time. So we didn't plan for it but that's definitely a technology that we planning to use around the world.
Worlds, because lithium is kind of booming because it's driven by <unk>.
<unk> batteries.
Cause and other products as well. So this is a new segment that we're getting into that we didn't plan for before we acquired <unk>.
I am Linda.
Not aware of any mine in California, there is projects going on in the south.
But please know lithium coming out of it so.
Which mine are you referring to.
I'll ask Andy if it to come back to you with the exact name I don't remember exactly the name of that 90 in California.
The deal that was concluded just before we conclude it's with pure light as well and that has evolved itself nicely in the meantime, but it's a long term project, which is really promising for us.
Welcome back.
Alright. Thanks.
<unk>.
Our next question is from the line of Steve Byrne with Bank of America. Please proceed with your questions.
Yes, I wanted to better understand the relationship with Siemens.
Is it is.
Is it fair to characterize that.
Have your customers that you're primarily support with water they might have a.
A completely different set of customers that are more energy focused and is this in a way to collaborate.
You might pick up new accounts on the water side, they might pick up some of your accounts on the energy side.
Is that how you would characterize it. So this is essentially a market share expansion opportunity for you.
Steve It's a combination of.
Of that music cross selling in other words, so customers we have they don't that we bring into our customers any other way around as well so for them, but at the same time, it's developing so joint solutions that are adding value for customers because they manage power in it.
Plant electricity in a plant something we don't do but we manage water in our plants. So from end to end and both are related as well it's a connecting.
Our applications is not only good for both of us <unk> and ecolab, but most importantly, so good for our customers.
And just.
I'm sure you've evaluated this but do you see any risk of that.
Humans could become more of a competitor of yours, such as to expand into more into water.
No because this is not an expertise that they have.
Planning to have expertise in water management.
Chemistry in service, that's be providing and we don't have the DD ambition, either so to become so and electricity power experts.
Well, so far industrial customers. So we're in a very saw healthy place, where we work together for the good if I were customers with no risk between the two companies.
Thank you.
Thank you.
Final question is from the line of Vincent Andrews with Morgan Stanley . Please proceed with your questions.
Thank you and I guess, just one last one for me just looking at working capital I'm wondering whether youll be kind of getting aggressive on inventory levels in the year end and not just because your cash flow from operations I think it's down about $500 million year over year, but also because we've seen amongst a fair number.
The chemical companies through earnings season, sort of a desire to take inventories down to kind of send messages to the raw material suppliers.
The raws prices need to come down as well so is that something that you folks will be working on.
Let me pass it to Scott.
I'll take that thanks for the question as we look at both our working capital in.
Cash conversion as you've probably seen.
The free cash flows have been very strong below last year because of the investments in working capital both as the pricing is growing the investments we have in <unk>, but also the investments in our inventory and we're continuing to invest in inventory as we look ahead, especially as we look across Europe , and just continuity supply and making sure. We can supply to customers. So do not have specific actions to bring.
On inventories because for us making sure we can supply to our customers is most important but still expect to have very strong fleet free cash flow conversion for the year and we will expect that to accelerate as we get into the fourth quarter getting towards our historical levels around 90%.
Okay. Thanks, guys.
Thank you.
At this time, we've reached the end of the question and answer session I will turn the floor back to Mr. Herbert 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 time, Rick dissipation I hope everyone has a great rest of the day.
Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.