Q2 2023 Ecolab Inc Earnings Call
Greetings and welcome to the Ecolab second quarter 2023 earnings release Conference call.
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And answer session will follow the formal presentation.
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It's now my pleasure to introduce your host Andy Hedberg Director of Investor Relations and you May now begin.
Thank you and Hello, everyone and welcome to the Ecolab second quarter Conference call with me today are Christophe Beck, <unk>, Chairman and CEO and Scott Kirkland, our CFO a discussion of our results along with our earnings release and the slides referencing the quarter results are available on <unk> website at Ecolab Dot Com Slash investor. Please take a moment to read the cautionary statements in these materials, which stay.
That this teleconference and the associated supplemental materials include estimates of future performance. These are forward looking statements and actual results could differ materially from those projected factors that could cause actual results to differ are described under risk factors section in our most recent Form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings.
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 Q2, our team delivered another very good quarter building on continued strong momentum in once again, making further improvements compared to the last quarter.
Joining execution as well as easing inflationary pressure helped us get to the upper end of our expected Q2 earnings growth range in an environment that remains unpredictable I will shift to offense continues to gain traction and our confidence in delivering near term performance. That's ahead of historical leverage trends clearly keeps getting stronger.
Organic sales growth remained strong up 9% driven by the steady recovery of institutional specialty with 13% organic growth pest elimination and industrial follow delivering 11% and 9% organic growth respectively.
Despite softening global end market demand overall volume trends remained steady.
The good news volume, excluding Europe improved from flat in Q1, two 1% growth in Q2, so volume trends are improving further too.
Adjusted earnings per share grew 13% led by strong organic operating income growth that accelerated from 19% in the first quarter to 21% in the second.
Although year on year comparisons are getting harder pricing remained strong at 10% as further new pricing continued to grow.
Delivered product costs were 5% higher than last year, but sequentially a bit more than expected, which is further good news.
We keep working on strengthening our performance, including targeted reductions in institutional life Sciences, and healthcare institution that had another remarkable quarter as it continued its very strong recovery focus on your business and penetration drove share gains in unit served solutions sold and sales delivery.
Gross value pricing and productivity drove strong margin improvements, which we expect to continue in the second half.
Currently innovation and labor automation positions institutional as the ultimate leader in our market and they're going at foundation of transformation driven by evolving consumer habits and increased use of digital technology all good news for us.
Our highly attractive life sciences businesses was not immune to the short term market pressure, which led to flattish states. However, this is much better than competition and life sciences growth potential remains extremely strong even if the short term market transition takes a few quarters to get back to strong growth we staying on offense, we're taking this doesn't.
The opportunity to gain share with major customers and to further invest in capacity and capabilities in biopharma and under dropped here of water even if it results in short term operating income decline.
As promised we're also continuing our rapid transformation in healthcare in the first quarter, we announced a restructuring program to rightsize our cost structure. This is progressing well now over the next few months. We will also be creating two separate yet focused business from our north American business surgical <unk>.
Infection prevention.
<unk>, which provides protective drapes for surgeons patients and equipment and operating rooms will become a standalone business infection prevention on the other hand, which provides environmental hygiene to reduce hospital acquired infections will leverage the critical mass of our North American institution that field sales and service organization.
Expand customer reach and significantly improve productivity.
It's just a further step on our journey to transform <unk> into a profitable business that serves hospital exceptionally well.
We continue to focus on margin improvements, which improved 130 basis points in Q2, we also accelerated our shift to offense.
1100, corporate account managers achieved a record new business pipeline by leveraging enterprise opportunity is to drive penetration and by focusing in your business prospects to expand our reach.
And we're more than 25000 field sales associate sharpen their focus on exceptional service and deploying new business, which resulted in promising share gains. Our 12 foundries scientist remain focus on breakthrough innovations, which enable customers to achieve better outcomes at a lower total cost through reduced use of natural resources. We also.
Renting up our investments in digital technology with Ecolab <unk>, one of the largest Iot cloud and the industry and our <unk> thousand digital experts, we are uniquely positioned to further empower our field and customers to deliver best in class performance during lease unique customer value improved field productivity and deliver.
And exceptional customer experience you will have the opportunity to experience some of this firsthand at our Investor day in September .
In summary, we delivered the second quarter exactly the way, we want it with strong top and bottom line momentum despite the challenging environment.
Looking ahead, we anticipate delivered product cost to remain high but ease progressively and for global demand to soften further.
Although none of this is new the good news is that we are well positioned to win in this environment as our momentum keep speaking up in the second half up to Europe , We expect volume growth to continue improving and gross margins to expand 150 to 200 basis points versus last year.
During the last few years, our expertise group as we maintain our team and rolled out new innovative solutions, our retention rates remain high as we protected customers from supply shortages, our margins continue to recover and our organic operating income accelerated as we drove pricing in thoughtful ways, while increasing customer.
Got you.
We expected adjusted earnings growth in the third quarter to improve further and to reach 12% to 19% with continued strong momentum as we exit the year. Finally, we will remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing our leverage and returning cash to share.
Holders as we've always done most importantly, which the best team science and capabilities in the industry. We will continue to grow our share of the high quality of 152 billion market research in other words, our future has never looked brighter I look forward to your questions.
Thanks, Christoph that concludes our formal remarks as a final note before we begin Q&A as Christophe mentioned, we will be hosting our 2023 investor day at our Nalco water headquarters in Naperville, Illinois on Thursday September 14th if you're interested in attending or have any questions. Please contact my office operator would you. Please begin the question and answer period.
Thank you well now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you. Our first question is from the line of Tim Mulrooney with William Blair. Please proceed with your question.
Good morning, Chris Good morning, Tim.
Just one question from me today, you touched on this a little bit in your prepared remarks on the institutional margins, but I just wanted to dig in a little bit more because I noticed.
Institutional margins they were essentially flat year over year in the first quarter.
It jumped up significantly in the second quarter.
So on progress to rebuilding back to those pre pandemic margins can you just talk about what drove that inflection in the second quarter or why it happened now and.
If you think that type of expansion is sustainable in the back half of this year. Thank you.
Thank you Jim Great question, because institutional is our largest single business.
As you know, India company and they had a remarkable quarter in Q2, which followed a very good quarter in Q1 as well so I've been very impressed with how the team delivered once again. So you mentioned, it's up 13% sales growth, 40% operating income growth.
The team executed perfectly well and what's important is that our new model.
We announced a few years back now he's focused sales and service organizations, one really focused on driving gains and the other one servicing customers extremely well with this new organization is working really really well that was the right move that we made a few years back.
So we're gaining share with new business.
This business has.
And new business pipeline, which has reached record highs over the past few months and they've done an excellent job at executing.
This new business pricing has been very good as well.
Which is being driven by the total value delivered that they're delivering for customers that need it so more than ever even if I look at the unit share as well in the market with the number of units or went down.
We quite stable versus 2019, which is a remarkable penetration is up as well, which program like Ecolab science certified thats driving the usage of much more solutions than in the past as well in that business and whatnot that point mentioned it. So many times so since 2019 the food.
<unk> in foodservice restaurants dining traffic is down a third I would say is in that same segment in the U S is up 12% so a massive.
Share of gain that we have.
Delivered care. So we expect this momentum to continue in the quarters to come and I, even think that the.
Oi dollars.
We had in Q4 2019, where it could be pretty close.
Closely delivered in Q4, this year as well, which means that we would be in dollar terms very close to where we were in 2019 and well it's only upside from here. So institutions did really well, it's driven by fundamentals of new business of pricing or productivity of gas.
As service and I like where we are and even more where we're going.
Thank you.
Our next question is from the line of Ashish Sibaja with RBC capital markets. Please proceed with your question.
Thanks for taking my question so pretty.
Pretty solid gross margin expansion in the quarter and thanks for providing color on the gross margin expansion for the back half of the year as well.
I was wondering if it's possible to quantify what the hell of a product cost was in the quarter and that was obviously a comment on the delivered product cost to ease, but I was wondering if you could.
Quantify how we should think about those delivered product costs in the back half. Thanks.
Hey, Thank you Ashish.
That question since you are too Scott that was CFO , yes, hi, Ashish. Thanks for the question, Yes. As you said gross margins improved nicely. It was up modestly in Q1 20 basis points, but really saw great expansion year over year in Q2 up 130 basis points as Christoph said continue to drive new pricing as well as maintaining the pricing that we'd already.
<unk> achieved an had hit that peak.
Pricing in Q1, but continue to drive new pricing and then seeing that DPC inflation easing a bit. So as you said with that is that easing inflation on DTC as well as the new pricing is what is going to help drive continued margin expansion from that 150 to 200 basis points year over year. So we expect DTC to continue to be.
<unk> up year on year, just at a smaller rate as we see in the second half of the year. So as we set up 9% in Q1, 5% in Q2, and probably low single digits in the second half.
Thank you.
The next question is from the line of Seth Weber with Wells Fargo. Please proceed with your question.
Hi, good morning.
To go back to the strength in the institutional margin for a minute.
Have you can.
Can you provide us kind of where you're at on the cost saving program just trying to gauge.
How much of that how much of the margin expansion as a function of price versus volume versus the actual the cost initiatives that you guys said.
Kind of started to talk to but not clear what are you are at in that process. Thanks.
With this.
I'll pass that question as well so to Scott, but before I do so.
The two main drivers institutional all volumes less new business and the pricing that they've done really well also fed by new business.
On the restructuring that we announced as well early years. So he is going quite well, but I'd like to have Scott to provide some more details on that.
Yes happy to do that yes, Christoph said institutional margins are doing very well, it's really a combination of everything as we talked about earlier this year as part of the expanded program that expanded program had a total run rate savings of about $195 million.
And we expect to realize the vast majority of that is call. It 80 plus percent of it by the end of this year we're progressing.
On track for that about that pace through the end of Q2 and that represents for the full program as well as the institutional in the IMS business.
Thank you.
A reminder, we ask you please limit yourself to one question. If you have any additional questions you may reenter the queue at that time.
The next question comes from the line of John Roberts with Credit Suisse. Please proceed with your question.
Thank you and nice quarter can you give us a rough split of the health care business between surgical and infection in North America and.
Why it's surgical so much smaller in Europe .
Yes, John Hi, So in North America, it's roughly half half.
And in Europe , its mostly infection prevention, which is the reason why the bifurcation that I've talked about is happening in North America, because in Europe , It's a different business almost focused on infection prevention today already.
Yeah.
Our next question comes from the line of Josh Spector with UBS. Please proceed with your question.
Yeah, Hi, Thanks for taking my question, just Christophe and intrigued by your comments around volume about them continuing to improve I think there are a lot of companies have been a little bit cautious about some of the trends in Europe .
Still a relatively sizeable market for you. So what are the drivers that you see that gives you that confidence about March volumes, improving and when you talk about that is that up year on year or is that sequential thanks.
Yes, Josh.
Each year on year.
So the improvement that we will see some in Q3 and in Q4 and in Q2 I was pleased to see that excluding Europe .
Our volume so went from flat to plus one year on year.
Once again and it's all driven.
By the way.
We are driving the business.
As the end markets.
Honestly saw everywhere around the world.
Have a tendency to soften Eaton a true everywhere, but for the most part.
This softening quarter after quarter, hopefully that's going to change as well overtime, we not counting on that just to be clear our assumption is really that the end market trends well.
We will continue to soften in the next few quarters, how are we driving.
It's the old fashioned way by.
Driving fundamentals.
Starts with new business.
This is a practice that we have a perfect itself over years slash decades.
Our as we call it to grow to wind pipeline, which is our new business pipeline is at an all time high.
Right now and we need to deliberate abuse by executing its a customer by customer in some businesses, it's quicker like an institutional where it takes a bit more time in industrial since its heavy equipment that we need to install but new business.
He is really good penetration as well as new solutions.
Within existing customers.
<unk> is a priority for us because it's the <unk>.
Lower cost to execute because we go to those customers anyway.
It is improving as well innovation.
<unk> is also in a very good place our innovation pipeline is also at an all time high. So it is an execution question as well so to get that done, especially in what we call. The Mega markets in North America, Western Europe and in China, While we follow closely after in India.
Other markets around the world. So those are.
The big reasons, and it's also driven by our <unk>.
You are growth businesses like data centers.
Rowing over 20%.
<unk> electronics closed close to that.
As well.
Our water business.
Thats doing really well at the same time, so it's really focusing on the fundamentals what we can control because we can't control what's happening on the market.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you Christophe you are investing in the business.
Any way to quantify how much more you're investing this year than last year on either an absolute or relative basis. Thank you.
Good question I think thats for our CFO as well. So we're looking forward to more questions last time, you had half a question. So I'm glad that we can do anything denim today, So Scott yes.
David What I'd say is I would give you a specific number here I would say we've continued to invest in the business I am not significantly different than we have in the past as we've said to the last few years, we've continued to invest in the business, adding capacity maintaining the team investing in the team. So proportionately. It is not the big driver of what you're seeing from the.
Oi margin expansion any change in that investment.
But maybe one comment I'd like to add as well so to that David is that we differentiate.
How we invest behind our business, so just to share a little bit how we thinking about that as well we call our growth engines.
Four.
More investments because they grow faster they have a higher margin as well.
We have another category, which is more transforming.
Businesses that could get better as well they get a bit less but they are very focused in how we can drive our better margins and then you have kind of the third categories are the ones that need to become more profitable.
They get less investments until they get to the right profitability margin. So we really do that in a thoughtful manner by business by market, making sure we invest the best way we can.
Our next question is from the line of Jeff Zekauskas with Jpmorgan. Please proceed with your question.
Thanks very much.
Your SG&A costs are up seven 5%, which is about your rate of sales growth.
Why isn't SG&A, calling off at a lower rate.
By contrast, your cost of goods sold sequentially.
6% revenues are up eight so it looks like your raw materials are falling and I take it that that's giving you. Some benefit is that correct and then lastly, it's been a hot summer.
Did that give you above average or better water treatment chemical demand in the third quarter.
Great question. Thank you Jeff.
Three questions here for Scott I guess.
Hey, Jeff Yeah, I'll touch on the SG&A. Good question. The SG&A was up little over seven 5% year on year in the second quarter, what I would tell you the underlying productivity remains really strong.
Head count has come down actually modestly over the last year, while sales has increased.
Our SG&A ratio was flat in Q2, but just as a reminder, we're down about 300 basis points over the last three years.
The Q2 SG&A increased.
More than half of that was really driven by what we call the higher incentive compensation and really is driven by our strong performance. So what I would say around that as well as on the SG&A I would expect in the second half the SG&A dollars to be pretty stable from what you saw in Q2.
Which would mean, it's sort of the mid to high single digits for the year certainly in Q3 as you might recall, we're going up a tougher comp in Q3 last year, but we also expect longer term to continue to drive productivity as we're leveraging the digital investments that we've made over time.
So thats on SG&A.
So an additional comment here.
We've had that question so many times.
Jeff I know you have or you reached the bottom in terms of.
SG&A ratio the short answer is no because of what it is.
Scott just said.
All the digital technology that we've been implementing plus all what's to come.
It will improve the performance of our organization so for this year.
Back to SG&A dollars or to remain kind of stable quarter after quarter, keeping in mind that our head count at the same time.
<unk> is slightly down as well, which is driving that productivity not because we spend less time with customers, we spend more time, but we ultimate most of Transat.
Transaction that would work if I may say Youre second question was on.
Delivered product cost.
It is.
Using a beat foster.
Had expected, but it's important to keep in mind, it's still 40% up versus two years ago.
Pre inflation. So obviously that trend is a positive trend for us and I'll take that obviously to improve margins as well, but most of the work is on pricing and new pricing, which is going really well and your last question on this summer.
In 172 countries.
So it's not impacting.
In material ways.
Business the way, we look at it so.
No influence of that at least no significant one.
Our next question is from the line of Christopher Parkinson with Mizuho. Please proceed with your question.
Great. Thank you so much just on the institutional side you have some very helpful commentary by region I was just hoping to dive down a little bit more.
On the volume trends in the various geographies, obviously, specifically in North America, and just what ultimately is underscoring the confidence and kind of market share gains just given all of the volume volatility in the post Covid era, just any color on that and just trying to extrapolate.
Where the real opportunity is heading into 'twenty four and 'twenty five thank you so much.
Hey, Thank you Chris.
Institutionally, it's been pretty broad based improvements that's been true.
In the three Mega markets again, as we called out in North America and Western Europe .
And in greater China.
Good progress on all three fronts here, which is our main focus and then we have all the other markets.
Which are doing very well as well at the same time, even though they are secondary in terms of investments and in terms of our priorities.
For us the way we grow.
Volume is really so in institutional to get even better at CTC CTG circle, the customer circle the globe.
And more modern way to describe it with enterprise sale.
To have an exclusive or as close to exclusive partnerships with our global customers a program like Ecolab Science certified which is mostly focused on North America today, well helps the customer secure.
There their guests improve that performance and improve as well as guest satisfaction at the same time when they use all of our product as well at the same time many of our customers are franchised organizations, which means leveraging what we do is helping deliver the quality standards that they were.
Once that they define at the central level anywhere around the world, It's only us who ultimately can deliver that as.
As well and last but not least <unk>.
Solution to improve labor alternation institutional customers have had very good years in terms of margins. The last two years, because they've managed to have higher prices and lower cost initially because.
Of the labor shortage and ultimately you have noticed that it was a good way to improve their margins and our innovation is focused on helping them keep those better margins by out to meeting the work that used to be done by what I would call cheap labor. So those are the main drivers for the growth in institutional.
Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.
Yeah, Hi, Thank you Christoph I guess in health care.
Apart from perhaps increased focus so I was just wondering if you could help us understand house cleaning.
Change the growth trajectory here.
You've obviously tried a few different things in health care. So I'm just wondering.
I guess one last attempt.
Hitting the portfolio just some longer term thoughts as well would be appreciated.
Thank you Manav.
Good question.
On healthcare, so we will stay serving a hospital just with what we do as a company saw protecting what survival, reducing hospital acquired infections. So remains a point of focus the fact that our health care business has not been growing and has not making money so far quite a very long time.
Saying that I have committed to change.
And I made that commitment pretty clearly.
A year ago. So what we're doing is a very thoughtful plan.
Quarter after quarter I want to make moves that are driving us to a place.
We're it's a business that's growing nicely, it's not going to be high growth, but that we get good profitability. The first move was really so in Q1 to do discussed restructuring.
In North America, and in Europe , So to get the right cost base and Thats.
Evolving so pretty nicely, we unplanned day.
Delivering on that front and I wanted to make a second step, which we announced a week ago to the organization and wanted to share with.
You as well in the release and on that call, where we wanted to have those two businesses surgical which is really focused on on drapes protecting surgeons equipments and patients which is very different than our infection prevention business, which is much more traditional.
Ecolab business of hygiene.
And disinfection infection prevention, while those two businesses, we wanted to have them separate and more focused this serving two different parts as well in the hospital and most importantly, our infection prevention business, which is the one with the lowest profitability cannot afford the cost structure that we have today.
On the other hand, leveraging the huge sales force that we have an institution in North America, well they get immediately.
Much broader reach on the market peak is institutionally serving hospitals on the foodservice.
In hospitality side today already and at the same time get a huge boost in terms of cost productivity. So we improving infection prevention business performance kind of almost overnight, it's going to take a busy so a few months to get there, but I know for sure thing it's.
Hence wireless surgical business, which is doing quite well and with good margins is going to remain a focus business. So we have those two businesses in a better place and Thats. The next step that we want to execute towards our ambition to have a good <unk> business and she mentally.
The next question comes from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.
Hi, Thank you I actually want to piggyback on <unk> question.
Infection protection business going to be kind of folded into institutional if youre going to be leveraging their sales and service organization.
What is going to be kind of stand alone on its own and.
By separating these businesses does it also make it easier if you can't get them to the place you want to be to kind of sell them off in bite sized pieces.
So not to impact in your question <unk>.
Shlomo, so I'm not going to comment.
About the future it gives us more options.
Put it that way, but we will have those two businesses one our surgical business. Our <unk> business is going to be a stand alone.
Its own.
Divisional structure supply chain so.
Very verticalizing, if I may say the infection prevention business, we're going to have the best of both worlds because we're going to have a division that's focused on on corporate accounts on marketing on innovation R&D really so driving that.
Business strategically why commercial execution is going to be done.
By institutional where you get much more reach and a much better cost structure as well at the same time. So two focused business is surgical totally verticalizing infection prevention, a separate division, but leveraging institutional as the commercial arm.
Our next question is from the line of Andy Wittman with Robert W. Baird. Please proceed with your question.
Okay.
Excuse me for taking my questions I wanted to dig into the.
Excuse me the life Sciences performance in the quarter and your comments Christophe about how there is some short term disruption in that marketplace.
I was hoping you could elaborate on this perhaps address.
What's the cause of this short term disruption, perhaps maybe that's related to the prior few years. So it's all the vaccines and Covid and other things like that maybe we just need to come off of that period I don't know and if you could just talk to that.
Confidence that you have in the recovery it sounded like it's not going to be necessarily right here in the third quarter and you said I think maybe the comment was a few quarters.
But any detail.
Can you tell that you can give to support the return to that growth in life sciences, including whether Thats. The legacy life Sciences business or the newer filtration business that you acquired <unk>.
A year or so ago.
Thank you Andy So life Sciences is a great business.
Being a great business. So it seems to be started.
2017, when we brought so the various pieces together in the future is even better.
Well, it's going to be the Golden age of pharma and Biopharma is going to be the new way of producing drugs and vaccines going forward as it has been demonstrated.
With Covid.
The past few years, so a great business that has delivered very well we severely good future pure light is a new element to that.
Business, which adds drug filtration.
To it as well as new capabilities filtrate any other liquid, especially so watering now the industries.
As we've mentioned so the industry is a bit under pressure today I feel pretty good with our flattish growth because if I compare it to competition, which are great companies by the way.
Their growth is way down so being flattish I feel pretty good about that it's driven by what you mentioned.
Still the outcome of the past few use.
With Covid Covid related production in.
Inventories as well and in an industry that is basically getting ready so for the future. It's not going to last long. It's been the last few quarters. So we don't see a major pick up in Q3, but I think it's going to happen over the next few quarters, but if anything when I look back so.
A year ago. However was looking at life science, However, looking at the market and the business today, what I feel really good and even better.
Where we're going which is why we decided to stay on offense, even if the market is pressured.
Why it's not going to last forever. So for me, making sure that we can get more new customers that we can build capabilities, which means expertise people on the street people in R&D innovation and at the same time, a building capacity as well so to produce for the future.
It's the best time to do it that has an impact on the operating income margin. That's okay. Because we know that that business is kind of north of 30%.
On a long term run rate basis, each worth doing itself, a few quarters a bit pressured, but we're going to get to a better place and that business is more promising than it's ever been so I feel good about life Sciences.
Our next question is from the line of Patrick Cunningham with Citi. Please proceed with your question.
Hi, good afternoon, so we're starting to see some deceleration on pricing and what can we expect for normalized pricing going forward and specifically on the water business and you've highlighted the unique competitive position and customer sustainability objectives. Do you think that will translate into higher pricing power relative to historical pricing. Thank you.
So to short answers.
Sure.
Correct.
First one is.
The deceleration of pricing.
You mentioned it is 100% related so two year on year comparison.
The carryover.
Kept 100%.
It including the energy surcharge.
The way and on top of it.
We're expanding as well new pricing.
As we become as well even better we've always been good at pricing as an organization what over the past two years, we've become even better because it's been so much related to the value we create for our customers of the savings in their operations in dollar and we want to make absolutely sure that net net it's a positive story for customers.
Which it is so that's the first answer.
Clearly so.
It does slow down entirely related to our year on year comparison.
Gary over a stable and.
Pricing is expanding which leads to the second question.
Pricing for the future I don't know, where it's exactly going to shake.
Shake out we've been.
Always within the range of 1% to 2%.
In the past 10 years. So pre these inflationary time post that cycle whenever that cycle is over is going to be better than that I don't know exactly what the number is going to be but it's going to be north of two that's for sure.
The next question is from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Hey, good afternoon, so it sounds as if the path to positive volumes in the back half as youre widening the spreads.
At Ecolab can get versus the end market.
You see that developing in 2020 for 2025 do you think you can keep the new wider spread or expand it further or do you see kind of this.
Contra cyclical end markets recover maybe equalizes volumes spread sort of.
Compresses a little bit.
We'll see where we end up.
In 24, if I'm looking at.
Currently I am pleased with the fact that we better.
The market the fact that we improving ex Europe as.
As well in Q2 and that we are in positive territory is a very good sign a liked the evolution that we are having.
In Europe as well, we have a great team doing very good work over there. So Europe is going to improve as well. So over time, new business is very strong as mentioned earlier. So it's really focusing on what we can control new business penetration innovation.
Enterprise selling those are the old fashioned good ways of driving volume we've been successful so far as mentioned the last two years, we focused primarily our attention on pricing and margin we shifted our attention primarily on volumes. So.
A quarter or two ago, and it's working and usually those trends take a few quarters so to take hold in our organization, but when we have good momentum.
<unk> remains as well so I feel positive about where we're going for the second half so for sure and I see no reason why it shouldn't be good for 24 as well.
The next question is coming from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes, good afternoon, perhaps a two part question on the price cost spread Christoph on the price side would you call out any particular areas, where youre seeing the most positive sequential momentum on price realizations and.
Perhaps other areas, where it's more of a struggle and starting to flatten out sequentially and on the cost side really a similar approach. Your question in that are there particular areas you would call out where your costs are dropping fast on a sequential basis and other areas, where you have stub.
Earn increases.
Yeah Kevin.
I'll give that question so too.
Scott, but before we get there.
Again, so mentioning an underlining.
How we look at pricing, it's really twofold, it's on one hand, making sure we keep the carryover that we don't give price back and that's been working really well across the board and at the same time that we can drive new pricing.
Well in all businesses and that's been working very well.
Well so in the organization that we set.
Up to Scott to give us some more insight, yes, hi, thanks, Kevin Yes, we talk as Christoph said.
Carry on pricing the pricing, we executed last year, which we said had peaked at the 13% in Q1, but continuing to derive that new pricing and really the pricing across the board as I think about it by segment very strong pricing across <unk> industrial health care life Sciences, and our other segments, which is mostly past us.
Youre aware, but really strong pricing both that we had in the carry and the structural pricing we did last year as well as the new pricing that were continued to accelerate this year as I think about to your other question from a cost perspective DPC.
Industrial took the lion's share of the cost increases over this inflationary environment over the last couple of years. So that's where we're going to see the biggest impact as that EPC costs have started to ease, which we talked about in Q2, which was 5% relative to the 9% last year. So as that continues to ease we will likely see the biggest bent.
In industrial just given that they took the lion's share of the increase over the last two years.
And Kevin I would like to remind you that just two factors I mentioned before as well so we saw industrial.
Having reached in Q2 already to 2019 operating income margin, so which is a very good sign and IMS, so institutional and specialty in dollar terms not in margins being back to 2019 in the fourth quarter of tissue as well so two big indications.
Our two major businesses that have a margin recovery is really well on track and it is not going to stop there it's going to keep improving.
Our next question is from the line of Steve Byrne with Bank of America. Please proceed with your question.
Yes. Thank you.
Yes, Tahira and estimate from you on what fraction of your sales would you say <unk>.
Involve.
<unk>.
Your customers that either you own.
Or that is proprietary to us it would have to be removed.
Competitor were to come in and Scoop up that that business in.
With respect to competitors are you seeing any changes in competitive dynamics out there such as the Salinas diversity combination are you seeing anything coming out of that.
So a few questions.
So to unpack so Steve first on the equipment question.
To remind you is a 95% of I would say is all recurring so it is not equipment by definition. This is.
Mystery or lease programs digital subscription so.
<unk> that you get.
Recurring Lee on a monthly on a weekly basis. So you keep component is really really small at the same time.
Since you have equipment.
Those customer location, while it increases the stickiness as well so.
Our business with our customers not obvious to change so from us to someone else, especially since equipment is not going to be at the same level of technology.
Say, the least but this is not the way, we driving our business with our customers.
We want them to stay with us.
Because it's hard to change the equipment, but because they get the best service the best customer experience and most importantly that the total cost of operation is going down because they reduce their usage of natural resources carbon and water and at the same time.
As well as the labor.
So that's the way, we drive our business, 95% recurring less than 5% equipment.
Equipment and to your last question about the competitive situation.
Our competition is busy.
Right now, but we take them very seriously as we've always taken them and the fact that our new business generation is doing really well is a good indication.
That we kind of winning that work.
The next question comes from the line of Vincent Andrews with Morgan Stanley . Please proceed with your question.
Thank you very much I'm just wondering if you can give us a little more specifics on the volume.
<unk> segment, I mean, I see what you said for the total company and an extra basis, but can you tell us anything in particular about the key segments.
Yeah.
Yeah, Vincent so generally the volume profile.
<unk> is similar.
In every business like a lot what institution in specialty.
<unk> is doing as mentioned so many time.
Doing that coal they are in positive territory.
And are keeping accelerating so they are at the forefront they had the most to recover as well at the same time, but basically so doing really really well.
Industrial let's not forget that they had a lot of work to do in pricing over the past two years and as mentioned before.
Being in a position to deliver similar margins in this quarter in the second quarter than what they had in 2019 is a remarkable accomplishment and now so shifting over the last few quarters on a on the new business, what is helping improve as well.
<unk> industrial.
To call out as well that water in industrial is has been positive remains positive and has a very good story.
Well here and.
The drag easing paper.
Which is mostly driven by our customers are reducing inventories.
After all that.
The past few use disruptions that they had but I like the new business that we have in paper. So paper is going to improve as well the inventory may down of our customers is going to improve as well over the next few quarters. So all in institutional and specialty so.
Strong and getting stronger industrial improving as well with paper, becoming better over the next few quarters and I've mentioned, the other businesses, so getting better as well as we move forward.
Our next question comes from the line of Scott Schneeberger with Oppenheimer and company. Please proceed with your question.
Thanks, very much I have one for both U a quick one for Scott I'll ask them both upfront Scott.
You mentioned.
Head count down, but SG&A pretty steady through the balance of the year on an absolute level is that is that incentive comp, which is the delta and how should we think about that because you had a few challenging years. This looks like a really good year, how should we think about that in the back half and then going into into next year and Christophe for you.
I was going to ask on paper, but I also wanted to ask on in the industrial segment.
I think could you just did a couple of people pretty well, but food and beverage big sub segment there.
That's been double digit growth for gosh, a year and a half.
Are you continuing to win a lot of new business, how does that trajectory look and maybe maybe if you could.
They're down a little bit into the submarkets dairy beverage of growing food and just give us a little bit of color of of the strength you're seeing thank you.
I guess, Scott you start yes, Scott I'll start on the SG&A question, Yes, as I said the big driver in Q2 of the SG&A increase was incentive compensation and we would expect that similar level of sort of incentive compensation headwind as you see it granted it's the reason for it is what we're performing very well and re.
Building on that incentive compensation, but expect that to be the biggest piece of the SG&A year over year for the second half as well, but certainly as we've rebuilt on incentive compensation would expect it to be less of a headwind next year, but really more importantly, as we've talked about continuing to drive this SG&A ratio, which we've done very.
Well over the last few years, the 300 basis points and would expect although for this year because of the incentive compensation, the SG&A sort of productivity or leverage will be more modest than we saw over the last few years would expect to continue to drive that leverage in the future as especially as we're leveraging the investments we've made the cost savings programs that we have.
To continue to drive great opportunity on the SG&A productivity going forward.
And then the second part a few question obviously, so different so on our F&B business one of our largest businesses I'm really pleased with the work that the team has done.
In this in this business they've been able to work well on both growth and margin.
Recovery, they've been impacted obviously by the inflationary costs and delivered product cost, but managed well to manage new business and the margin performance second it's a positive industry. So it's serving consumer goods industries.
Familiar so risk most of them they've done quite well over the last few years and they're still doing well today. So it's a good place to be.
As an industry and the third point.
I'll make is that it's one of those industries, that's very interested.
And what we do.
It's about food safety, which is essential so for them, it's a non negotiable.
Obviously, so far for their brands and our customers do very well with it and at the same time.
They are the most advanced companies in terms of commitment.
Carbon footprint on water usage on waste management.
At a lower total cost which is exactly what we do.
For them. So they are very interested in what we do and the last point.
<unk> is.
We have this unique position of bringing water management and food safety in one offering.
Which no company. So today can offer we uniquely positioned.
For that to our customers and we perfect that model.
All the time and I like a lot where we heading because that's exactly what those customers are looking for which are the reasons why this business is doing so well.
Thank you. Our next question is a follow up from the line of John Roberts of Credit Suisse.
North American healthcare infection protection is going to use the commercial organization from institutional do you have any other examples.
Within ecolab.
Sort of cross segment collaboration like that and will that result in any inter segment financial reporting.
So two parts of your question John .
So we will for the time.
I'm being so keep that reporting consistent.
With what we've done for now I can't speak for the longer term, but for now.
I want to keep that consistency to keep the clarity I made a commitment to you that we will improve the health care business truly want to show.
The improvements that we're making it's not by folding it in something else that we are going to improve it. So we're going to remain consistent entrant sprint now the second part.
To your question.
An institution that are being used by other business is the best example, I can provide you is.
<unk> so the quick serve.
Restaurants, Mcdonald's Burger King Wendy's.
<unk> always more using dish machine.
In order to automate the labor they are having their restaurant as you know so curious is a separate business and it's been true for 30 years, it's not exactly a new thing.
Here was the institutional team is the one that's serving those dish machines as well it works really well because we get the reach.
As we have institutional everywhere.
The country and they get the cost productivity because of the critical mass and density.
Institutionally as having so what institutional is doing for.
<unk> is kind of similar than what we're looking to do.
For healthcare as well so it's a model that we've practiced in the past already.
Thank you.
Mr. <unk> there are no further questions at this time I'd like to turn the floor back to you for closing remarks. Thank.
Thank you that wraps up our second quarter Conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation and hope everyone has a great rest of your day.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect. Your lines at this time. Thank you.