Q3 2024 Ecolab Inc Earnings Call
Greetings and welcome to the Eco Lab 3rd Quarter 2024 earnings release conference call. At this time, all participants are on list-only mode. Question and answer session will follow the formal presentation.
If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. As our mind does, conference is being recorded.
Speaker Change: is now my pleasure at this time to introduce your host Andy Hedberg, Vice President of Vest Relations.
Speaker Change: said, but he may now begin.
Andy Hedberg: Thank you and hello everyone and welcome to EagleEb's third quarter conference call. With me today, our Christophe Beck, EagleEb's chairman and CEO and Scott Kirkland, our CFO. The discussion of our results along with our earnings release in the slides referencing the quarter results are available on EagleEb's website at EagleEb.com. Flash Investor.
Andy Hedberg: Please take a moment to read the cautionary statements in these materials, which state that this teleconference and the associated supplemental materials include estimates of future performance.
Andy Hedberg: These are forward-looking statements and actual results could differ materially from those projected.
Andy Hedberg: factors that could cause actual results to differ or describe under the risk factor section in our most recent form 10K and our post-demeterials. We also refer you to the supplemental deluded earnings for share information in the release. With that I'd like to turn the call over to Christophe Beck for his comments.
Christophe Beck: Thank you so much, Andy and welcome to everyone on the call. Let me start by thanking our incredible team for their hard work and seamless execution this quarter again.
Christophe Beck: It's because of our team's endless dedication to our customers and commitment to our goals that I have the pleasure of sharing another excellent quarter. They bring broad-based performance across our businesses and markets and geographies.
Christophe Beck: I will accompany you as never being as healthy as it is today and I'm proud to lead such a talented team with such a great future.
Christophe Beck: Moving to the specifics of our performance, I will third quarter was highlighted by strengthening volume growth, continued strong value pricing and robust operating income margin expansion.
Christophe Beck: He's all combined to deliver 90% growth in adjusted earnings. With these strong momentum, we are increasing once again the midpoint of our four year earnings guidance range.
Christophe Beck: As expected, organic sales grew 4% with very healthy growth across our businesses. Importantly, volume growth improved to 2% driven by strong business winds and breakthrough innovation.
Christophe Beck: The Eccola team, also delivered solid value pricing at the same time. In our target, you're 223% range in a quarter where carry over pricing is at zero, and you're pricing for 2025 is not in yet.
Christophe Beck: In a world that remains how to predict our solutions are more essential than ever to our customers. Back by our reliable supply and global expertise, our unique technologies are recognized to dramatically enhance productivity while significantly reducing water and energy usage.
Christophe Beck: The solid top line growth had to further increase our gross margin 220 basis points to 43.5%. Our West Union productivity also improved, consistent with our long-term trends.
Christophe Beck: In 2017, I West Union Erasure was over 29% and today, it's around 27%.
Christophe Beck: This year we expect it further improved from 28% in the first half to 26% in the second half, even after growth investments in frontline firepower, digital technologies and service capabilities.
Christophe Beck: and on a side note, third quarter is June also benefited from FX, which we expect will reverse next quarter. With this we anticipate fourth quarter is this June ratio to be flat-ish versus last year's fourth quarter, while long-term trends we keep improving 20 to 30 basis points per year.
Christophe Beck: Overall, our operating income grew 22%, and why margin expanded by 260 basis points to 17.9%. Which is very close to a record third quarter margin for E.C.A.
Christophe Beck: But if we're year 2024, we expect an OI margin of around 16.5%.
Christophe Beck: 50 basis points better than our early commitment and 260 basis points better than last year.
Christophe Beck: With a strong margin expansion momentum, my confidence in consistently delivering 12-15% long-term EPS growth has only strengthened. This will position ECO-LAP to reach about 20% operating in a margin target over the next three years.
Christophe Beck: Now I would like to transition our attention from Q3 to whether it teams are focused on the few long-term growth and margin expansion.
Christophe Beck: Our girls and jeans in clean tech, high tech and biotech. I showing strengths and momentum.
Christophe Beck: Even if each are the different stages of development, in the clean tech area, institutional specialty, as well as pest elimination, are both delivering strong performance, growing 7% and 8% respectively with operating in-comm margins north of 20%.
Christophe Beck: Global High Tech, which includes data-centric cooling and water for microelectronics, is growing at strong double digits. And in biotech, our life sciences business remains ahead of the curve in what we believe will be a huge long-term growth opportunity.
Christophe Beck: Our innovation pipeline also continues to build as we shift our focus from renovation to breakthrough innovation.
Christophe Beck: With nearly one and a half billion I will 2020 for pipeline is at record levels and laser focus on the biggest opportunities across our clean tech, high tech and biotech platforms.
Christophe Beck: Finally, our one-eak-alarm growth initiative, which seeks to leverage our digital technologies to deliver a best-in-class business outcomes, operational performance and environmental impact at every customer location around the world is progressing very well.
Christophe Beck: Over the next few years, Wannick Alab looks to more quickly unlock our current 55 billion penetration opportunity. I really focus on our largest and fastest growing 35 customers, is showing promising results with significant total value delivered for our customers and a great growth opportunity for E. col.
Christophe Beck: With strong long-term business momentum, record free cash flow and the proceeds from the sale of the surgical drapes business, our balance sheet is in a very healthy position. This provides us with many options to allocate capital to organic and in organic growth opportunities.
Christophe Beck: On Organic Girls, we are well positioned to scale unique customer solutions like our AI Dismissing Program for QSR and Circle of Water Systems for data centers and microelectronics manufacturers.
Christophe Beck: On the acquisition front, we now in a unique position to enhance our focus on the core fields of water, digital and life sciences to generate strong returns for shareholder.
Christophe Beck: In closing, I say it's every quarter and I'll see it again today.
Christophe Beck: The club's future has never looked brighter. I will leading customer value proposition where technologies had customers improved their operating performance.
Speaker Change: Why are we using the water and energy usage?
Speaker Change: is increasingly relevant, especially non-productive times and continuous tissue law of growth and margin expansion. Simps to put, we remain very well positioned to consistently drive 12 to 15% growth in a adjusted diluted earnings per share in 2025 and in the years to come.
Speaker Change: So thanks again for your continued support and naturally your investment in our company. I look forward to your questions.
Andy Hedberg: Thanks, Christophe. That concludes our full moral remarks. Operator, would you please begin the question and answer period.
Speaker Change: Thank you.
Speaker Change: Well now we can do a quick question and answer session.
Speaker Change: If you like to ask, we ask you, please let me yourself to one question to others while we're going to participate.
Speaker Change: That's a question at the time. You may press star one on your telephone keypad and a confirmation to indicate your line is in the question queue.
Speaker Change: You may press star 2 if you'd like to withdraw your questions from the queue.
Speaker Change: For a Christopher Syringing Speaker Equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment please will we pull for questions.
Speaker Change: Thank you, and our first question is from the line of Tim Moroni with William Blair. Please just see what your question.
Christophe Beck: I Christophe Good afternoon. Good afternoon Tim.
Tim Moroni: So I wanted to talk about volumes a little bit. Saw them accelerating here in the third quarter. It was great to see and it was slightly above our expectations.
Tim Moroni: I'm curious how you're thinking about that trajectory as we move into the fourth quarter and maybe you could talk about some of the moving pieces here, whether it's...
Tim Moroni: Institutional, what's happening there, volume-wise, or any other business that may be having an outside impact on that trajectory in volumes. Thank you.
Speaker Change: is in the team. Yes, I'm very pleased with the two percent growth that we delivered in volume after the one percent in the previous quarter, and especially when it comes with a continuous build in value pricing.
Speaker Change: It's been quite a long time that we managed to keep volume strong while building pricing while retaining customers.
Speaker Change: All at the same time, which was quite remarkable what the team has been able to execute for quite a while in especially in the third quarter.
Speaker Change: It's been because our team have been really focused the last few years at selling value for our customers That's generated the busy record levels of new business and innovation says But you question on how broad-based it is That's the best part of it because if I look at all our businesses Most are accelerating in terms of volume, which is good And I mean, especially pleased with institutional specialty that are growing and gaining share in a market that's going down
Speaker Change: and it's the same in industrial as well where most of our businesses are improving as well. They volume growth also in most markets that are either soft or going down. But if we look at the markets of the geographies, the regions, whatever we want to call them.
Speaker Change: in our company.
Speaker Change: Let's pretty remarkable, is that we've delivered 4% organic growth.
Speaker Change: when you're up.
Speaker Change: was flat.
Speaker Change: which means that the rest of the world outside Europe was obviously north of 4% which is demonstrating how nicely we growing outside of Europe which is a difficult place of the so to operate but on the other hand, really like the margins that we have over there, but the growth is going to be our priority going forward.
Speaker Change: i
Speaker Change: Thank you. The next question is from the line of Monof Putt and I click with Parklace. Please just see it through your question.
Speaker Change: Hi, good afternoon, this is Ronin Kennedy, I'm from an office. Thank you for taking my question.
Speaker Change: May I please ask Christophe as DPC deflation tell when it's said in inflation normalizes how did the drivers of margin expansion and the pace of it evolved so it's not mistaken there would be GM levers with two to three price, two to three percent price over one to two percent inflation.
Speaker Change: But to what extent is that margin expansion dependent on volume growth and the mixture whether it be to high growth, high-marm margin businesses or to digital?
Christophe Beck: Yeah, great question Ronan. So as you said, we expect deliver product costs or to
Christophe Beck: Get back to normal inflationary trajectory, kind of aligned with inflation as well, kind of low-singered digit growth. We expect that turn by the way to happen in the fourth quarter, as we've mentioned, as well early on. So the fourth quarter will be the inflection point where we've seen so kind of a little bit.
Christophe Beck: Flight Tailwind in a Q3 turning point in Q4 and then back to history-level in 2025.
Christophe Beck: That's the way we've been used to deliver as well in the past and I feel really good about that. Because the way we're going to deliver is ultimately by...
Christophe Beck: Staying focused on volume growth, keeping value pricing as well. Humming as it has so far as well. At the same time we'll keep working on...
Christophe Beck: Estyony productivity improving 20 to 30 basis points as well on an annual basis while we keep investing as well in the business as well at the same time. Ultimately, it's a year and up with these 12 to 15% earning spare growth, which we expect very clearly to deliver in 2025 and the years beyond as well. Which will lead us ultimately to the 20% or emerging that we've committed to and I expect to get there over the next three years. So, feel really good about the trajectory that we have even with DPC, deliver product while getting back to its normal inflationary.
Christophe Beck: Trans.
Speaker Change: Thank you for your appreciate it.
Speaker Change: Next question from the line of Josh Spector VBS. Please stay with your questions.
Josh Spector: Good morning. I want to ask specifically on institutional margins.
Josh Spector: I mean, if you continue to do quite well there, however when I look at margins relative to the past there's been a lot more seasonality so margins typically have been higher in the second half versus second quarter in the first half they kind of stable eyes.
Josh Spector: So I was wondering if you could unpack some of the moving parts there between maybe some of the reinvestments
Josh Spector: Product Costs, etc. And as you look forward, is this now a more stable margin profile for that segment when some of the changes you made in Europe, or you expect that normal feasibility to return.
Speaker Change: Thank you Josh. I'll give that question so to you to Scott and I'll add a few comments if needed of them.
Scott Kirkland: Yes, absolutely. Thanks Josh. As you noted, the margin performance and institutional specials have been exceptional. Q3, their OI margin was up through 100 basis, 380 basis, point versus last year. Talk to the seasonality certainly sales tend to be higher in the summer there. Sequentially we saw a very modest decline in Q2 to Q3, like 20 basis points, but that's really to your point. We're investing in that business as we are elsewhere, making field investments there. And so that's really what drove that just sequential decline. Q2 to Q3, but very happy with the margin expansion there, performing well. It's Christophe said in markets that are not helping. But given what we do, the labor savings are more important to Edward Orson.
Speaker Change: Customers and in quarters move around as you said. So I would expect OI margins for institutional, especially on a full year basis around about 22% so right around our long-term target.
Josh Spector: Thank you.
Speaker Change: Thank you. Our next question is in the line of John Roberts with Mizuhou Hosekiri. Please see it through your question.
John Roberts: Thank you. There are currently outbreaks that a major Delhi meet provider in a major QSR. When something like this happens, do you pivot the Salesforce to leverage that as a teaching moment for your customers and drive more penetration?
Speaker Change: It's an interesting question and it's always said that it happens usually with a Eugene fact on human lives and I feel really so.
John Roberts: Sorry for all what happens and every time happens as well when all things are happening on the market and
John Roberts: We really step back and look at it's never been happening to one of our customers just for us that's important to remember. And when it happens, we need to sum up those companies.
John Roberts: We're reach out and we offer our services and almost every time after a while they come to us and we work together in order to bring them to the right place.
John Roberts: But most importantly, we talk about that, so to our new customers that haven't gone so through those outbreaks, our current customers as well, what we've learned from it. So we never leveraged that as a sales opportunity, we leveraged that as a learning opportunity to use you term as well here and almost every single time those companies come and join us.
John Roberts: to do the right thing, the right way, and ultimately is to protect guests, patients, consumers which is part of our mission as a company.
Speaker Change: Thank you.
Speaker Change: Our next question, co-student line of John McNulty with BMO Capital Markets. Please to see us your question.
John Mcnulty: Yeah, good afternoon. I was hoping you could speak to the growth that you're seeing in the electronics and data center area and how you see that playing out over the next 12, 24 months.
John Mcnulty: and is it largely coming from existing data centers that are now converting over to and seeing the value kind of that your solutions bring or is it new data centers coming online? How should we be thinking about that?
Speaker Change: Thank you, John. It's a very interesting set of end markets. So we call it global high tech, but it's really too complementary, but differentiated end markets, micro electronics, obviously the production of micro processes and data centers.
Speaker Change: is, they're related but different.
Speaker Change: and to you question is it existing on new ones? It's both, which why to focus as much as we can to the new ones because we can embed our technology in the whole design of the data center or of the micro electronic.
Speaker Change: Production Site called a FAB, usually, but we work on both. Actually, maybe just for perspective as well. When I think about AI in the next five years, so 2025 to 2030, when you think about it, AI uses 4% of the power that's generated electricity in the US today, it's expected to use 10% to 15% by 2030 at the same time.
Speaker Change: AI globally will require as much water to cool those data centers.
Speaker Change: Then the drinking needs of the whole of India in the next five years.
Speaker Change: So we thought that we were heading for a water scarce world, well with AI it's just gotten way more acute
Speaker Change: So the fact that we're talking so two-dolls, high tech companies, the very familiar with that challenge and in the micro-processing worlds are in the pubs.
Speaker Change: We helped them produce those micro-processors in ways that we use and recycle water at every step of the production process.
Speaker Change: which is really complicated to do in the past.
Speaker Change: Well, they were generating wastewater that they had to either dump or try to treat before the dumped it never to reuse it. Well, all the new technologies that we are deploying with our customers, we use these and we cycle water so we're in the farm. And for them data centers.
Speaker Change: Technologies are evolving, up to now, most of the data centers were cooled because you were cooling the room where the computer was in.
Speaker Change: and tomorrow it will be so cooling the chip that's within the computer and it's called the directed chip cooling.
Speaker Change: and in both cases we have some very good offering and innovation so to help them do that job as well in ways that are reducing water usage in dramatic ways. When they reduce water usage, they reduce power usage as well at the same time. They improve the uptime as well and they reduce their cost, which is a very equal ad-like type of model. So we've created dedicated teams, both for that ascenters and for micro electronics in very dedicated markets because that's not happening everywhere around the world as we know. And we like what we're building, what we've built the performance of that business.
Speaker Change: and I expect it to become a major driver for us in the years to come.
Speaker Change: Great, thanks very much for the call.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Jason Hust with Wells Fargo. Please just see you through questions.
Jason Hust: Good afternoon, thank you for taking my question. I'm curious if you could comment on the deceleration in the water segment. I recognize it's relatively slight, but it was curious if that was entirely driven by mining or if there are any other factors, if there is some softness in mining, we just talked about when you would expect to be in a treatment there.
Speaker Change: Thank you Jason. You gave the answer actually. So water is very stable growth, as we had in Q2 was impacted by mining, which is the smallest business, by the way, which has a tendency to be more lumpy, not cyclical, but lumpy. It's in remote places, you send all those products as well in long distance as well. So it's not every quarter which is created equal, and that's the only reason for the water trend, otherwise businesses are doing really well. And they're turning up as well at the same time, which is a good.
Speaker Change: Great, thank you.
Speaker Change: The next questions from the line of Patrick Cunningham with City. Please do see you through a question.
Speaker Change: Hi, good afternoon.
Speaker Change: So I know what the early days of the con.
Patrick Cunningham: Could you just discuss how the one we go to the initiative is progressing in terms of commercial buy-in value pricing and some of the modest cost efficiencies you laid out in the prior call. And you mentioned the early focus on the largest 35 customers, but what's in the feedback from those customers?
Speaker Change: So let me give the first part of the question, so to Scott, and then I'll talk a little bit more about the so-called 35 top customers.
Scott Kirkland: Yeah, as we talked about last quarter, we've really just launched the program and as you said, it's very much full focused on growth, really getting after, accelerating to our 5 to 7% targeted sales growth, focusing on our biggest customers, leveraging the teams that we have. But very focused on growth, the savings are pretty incidental to the program frankly, but like the way it's going, getting to the best in class performance, the best restaurant, best hotel, data centers, within our network, and really transforming the way we work, working with these largest customers to get after, and it really accelerates that 55 billion opportunity across the opportunity that we have.
Speaker Change: So, to build a little bit on that, so it's a combination of three things. I've shared early on on previous calls as well here. So, it's to be exactly what Scott has been talking about, really so penetrating a much bigger share of the 55 billion dollar that we have as a penetration opportunity within all customers.
Speaker Change: and it's the total opportunity for the top 35 is 5 billion and half of it we don't have. So that's a penetration opportunity that we have. But second it's to help our team as well figure out what's the path in order to deliver that penetration opportunity, why delivering so the value for our customers and third it's to drive the product which is third priority but we take it.
Speaker Change: We know the technology helps us improve our productivity which helps us invest while keeping improving productivity as well at the same time. So one comment so for the...
Speaker Change: The Top 35, which is a combination of our largest 20 customers, plus our emerging 15. So those are the ones with the potential to become one of the top.
Speaker Change: 20s slash 35 in the future.
Speaker Change: Reception from our customers has been very positive because the way we sell is evolving. In the past, we've been selling so much more annually, incrementally, while the new things I can do for you.
Speaker Change: Tomorrow we're selling very different light.
Speaker Change: and it's saying, well, if one customer has a lot of facilities, locations, units, restaurants, well, we can help them understand if all your units were performing at the best performing unit, what would be the potential.
Speaker Change: and that's the new way of setting the saying, well you can get that much savings in your operation.
Speaker Change: In all three elements, first your business outcome, it can be food safety in a restaurant example.
Speaker Change: The second is the operation performance and third is the environment to the impact. You add all three, you get to a dollar impact, you translate that in a total value delivered, and we develop a plan in order to deliver that that's driving growth for us performance for our customers.
Speaker Change: and our customers have been very pleased with that approach and to be honest it was customers that were asking us to approach them that way so it made of usually to say to those customers much easier. Early on the journey but very promising so far.
Speaker Change: Great, thank you so much.
Speaker Change: My next question is on a line of Christ Parkinson's will research. Please receive your questions.
Chris Parkinson: Great, good afternoon. Chris, you could see you put a pretty good result in past elimination. The margin was just a touch bit lighter than we were anticipating. You can use hit on any color. I think that's a pretty asset like business. Is there a head count investment there? There is innovation in terms of digital effort.
Chris Parkinson: and any color of how we should think about the growth rate relative to the margin progress, even if you just want to hit on a longer term, would be incredibly helpful. Thank you.
Chris Parkinson: and you said it's a remarkable business.
Speaker Change: So, I think the digit organic growth, high margin, insane return on invested capital because there's almost no capital that's being invested in that business, a busy recommendation of high margin, low capital, so drive huge returns as well at the same time. When we compare ourselves with other companies, large companies out there and there's four, so it's pretty easy, that our large and then you have a zillion of smaller ones that.
Speaker Change: represent the lion's share of the market by the way as well. Well, we are the best performing business in the world as well. So when we look at that combination, best performing business in the world are great performance versus all our businesses as well that we have. Well, it's pretty easy to come to the conclusion that we should invest more behind that business.
Speaker Change: is exactly what we're doing, what we've been doing as well over the past few quarters and that's impacting the margin short term but for good results of the long term. And do you question where do we invest?
Speaker Change: It's basically in three areas. The first one is in innovation.
Speaker Change: You've heard about our pest intelligence business, which is ultimately connecting the million of devices that we have around the world in order to simplify the work that our teams need to do in a big conference center. Well, you might have 500 devices over there. You need eight hours to get it done. Well, with pest intelligence, you need 20 minutes to get the job done and you have a better result as well in terms of activity in those locations. So, better for us, better for the guest of the mirror.
Speaker Change: and better for the shoulder because it's a great added value business as such. The second is to invest in our team, it saves firepower to sell more better, to more customers around the world and the third one is to invest in a...
Speaker Change: Smaller Paul John Acquisitions, all focused on commercial, sometimes some residential is coming with it, but this is absolutely not our focus. We are commercial B2B business, I hear that's where we want to be in the future. So all in all, a great business that I believe has much more potential for the future that's why we invest in behind it as well and that has some impact on the margin short term, that's for great return long term.
Chris Parkinson: Thank you. Thank you Chris.
Speaker Change: Our next question is from the line of Shlomo Rosenbaum with Stiefel. Please proceed with your question.
Shlomo Rosenbaum: Hi, thank you for taking my questions
Shlomo Rosenbaum: with declining raw material costs, you know, that tailwind kind of now going to be behind you, should we expect...
Shlomo Rosenbaum: Andrew Hedberg, The College of Agricultural Sciences
Speaker Change: Well, ultimately, I want to get to that targeted range, obviously. That's going to take some time to get there. That's the beauty of our business. It's very consistent, very long-term, good momentum, and it's going to be a combination.
Speaker Change: of volume and pricing. I think the 2-3 on pricing range that I've been talking about and that we've been delivering as well in 2024 seems to be the sweet spot. We didn't know exactly where it would be. In the past, pre-COVID was one to one and a half and we see that 2-3 seems to be the sweet spot going forward and the balance is on the volume side.
Speaker Change: Interestingly enough, when I look at all our sales of all our businesses, we're close to 60% of our portfolio today is already within the range that we committed to at Investor Days a year and a half ago when we were together.
Speaker Change: So, the majority of our business are already humming in the right direction.
Speaker Change: And when I look at the opportunity we have out of the penetration, the $55 billion that I talked about just before as well, our new growth engine in water circularity, in high-tech, in pest elimination, in life sciences.
Speaker Change: But what's important is when I committed to 12 to 15, we don't need the 5 to 7 to get there. That's why for next year.
Speaker Change: Even if we keep progressing nicely, so quarter over quarter towards that range, we'll be delivering the 12% to 15% as well at the same time because value pricing is driving, obviously, 100% margin, the volume is going to help, and we keep driving productivity, as Scott has mentioned as well, so with the One Ecolab initiative, we're expected to have 20 to 30 basis points SG&E improvement longer term, while we keep investing 20 to 30 basis points as well in the three big categories that I mentioned as well on earlier calls. So generally, nice progression towards the range that we want to accomplish.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of David Banklater with Deutsche Bank.
Speaker Change: Pleased to see you with your questions.
David Banklater: Thank you. Christophe, staying on value pricing, how should we think about for next year in terms of being closer to 2% or closer to 3%? What are the key drivers for the lower and upper end of that band?
Christophe Beck: You know, it's going to be between two and three, David, and we always round that number to make your life a bit easier. So sometimes it falls under two, sometimes it falls under three. But you've seen this year, it's gone pretty well. We are 2% in Q3, because as mentioned in my open, as well, you have no carryover left in the third quarter, and you don't have the new pricing for the coming year in there either, as well. So it's kind of the lowest pricing quarter. That's always the case.
Christophe Beck: But for now, since we just have a few quarters under our belt of that, I want to make sure that I stay within that range, feel really good about that, and the closer we can be on the upper side, the better we'll be. The very good news is that, as I've mentioned many times, we drive that value pricing
Christophe Beck: based on the TVD, so the total value delivered that we deliver for our customers, the savings in their operation, in business outcome, operational performance, and environmental impact. And that TVD number is way higher than the pricing that we are delivering, which is demonstrating that net-net, it's a very good deal for our customers, and it's obviously a very good deal for us. So I feel really good about
Christophe Beck: staying, getting in that range and having it very stable for the longer run.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Pavel Makhlanov with Raymond James. Please proceed with your question.
Pavel Makhlanov: Thanks for taking the question. You had a divested share this year, but I'm not sure that you've acquired anything since 2023. What are your latest thoughts on the M&A front?
Speaker Change: So, we don't comment too much on M&A, obviously, so it's a lumpy proposition by design, obviously. We can't plan too much in advance.
Speaker Change: Let me share some perspective on that. So, we have a great track record of M&A, if I look at the 10-ish years.
Speaker Change: behind us. We did roughly a hundred transactions.
Speaker Change: smaller, bigger ones. So we have a lot of experience on how to do that really, really well with a very high success rate.
Speaker Change: The second point is, as mentioned in my open, we are in a great place.
Speaker Change: from a balance sheet perspective. Very low leverage, great cash flow, so a very strong, very healthy balance sheet. And the third point is our M&A pipeline that we've been nurturing for years.
Speaker Change: continuously is very strong and very focused on the three big areas I've mentioned all the time. The first one being in water technology, but high technology, not basic technology. Second, it's digital and high-tech. And third is in life science.
Speaker Change: So, those are the three big areas. So, I feel good with what we've done in the past, the position that we're in, in terms of firepower, and third, in terms of opportunities that we have. So, can't comment much on what's going to happen, but we're best positioned, ultimately, to capture whatever would make sense for shareholders and for the campaign.
Speaker Change: Penny.
Penny: Appreciate it.
Speaker Change: Thank you, Baba.
Speaker Change: Our next question is from the line of Jeff Sekoskis with J.P. Morgan. Please proceed with your question.
Jeff Sekoskis: Thanks very much. Year-on-year, was volume growth in industrial close to zero and volume growth and institutional and specialty close to four? And in terms of your 20% longer-term margin target,
Jeff Sekoskis: in three years. Would you reach that if you were at the bottom of your five to seven percent sales range? Or do you need to be at the top? Or it doesn't matter, you'll get there anyway.
Speaker Change: I feel really good about getting there for all the reasons that I've mentioned as well earlier.
Speaker Change: We don't need to be at 7%
Speaker Change: But if we were to continue on the track we're now, so the four to five, which is not my objective, obviously, so we want to keep accelerating our top line as well, but the environment plays a role as well around us, we would get to this 20% over the next three years. And if you do the math with the 12 to 15% by year for the next three years, you get very close to that. You add a few other things as well like the One Ecolab initiative, and you get there so pretty mechanically. We all know other next few years are going to be from an external world perspective we're going to react to that as we've done in the past as well, but I feel really good.
Speaker Change: Jeff about delivering that in the next three years as mentioned earlier.
Speaker Change: And then the volume growth question.
Speaker Change: The volume growth question, as mentioned, so to get within this 2-3% is obviously, or 1-2% sorry, and 2-3% on the value pricing is the base case, so to get to the 20%, anything that comes on top of that will help us get there quicker.
Speaker Change: Thank you. Thank you.
Speaker Change: Year on year, Jeff, just to understand that well. Yeah, we had INS in Q3, so I'm looking at the table here, is a bit north of 3% and industrial is a bit north of 1% in Q3.
Jeff Sekoskis: Thank you so much. You're welcome, Jeff.
Speaker Change: Our next question is from the line of Lawrence Alexander with Jeffries. Please proceed with your question.
Speaker Change: Good afternoon, it's Dan Rizzolano for Lawrence. Thank you for taking my question. I was just wondering if you've ever really talked about how much cannibalization new technologies does of some existing products, if at all, and if you ever really talked about the vitality index for you guys. Thanks.
Speaker Change: So the Vitality Index, the way we calculate it, it's the sales of new products introduced within the last five years. That's our definition. That's the one that we've been using for a very long time. It's around 30% plus, and it's growing with our increased focus on breakthrough innovations. Really pleased with that.
Speaker Change: and this is the number one objective that we have.
Speaker Change: If it's 30% growing, is there a target you guys have for the next, over the next, say, five years or three years, given what you've laid out before with your sales growth target?
Speaker Change: Sorry, Vitality Index is at 30% but growing, given your sales growth targets, is there a target for Vitality Index? Do you expect it to get up to north of 40% or higher or is that, I mean, how should we think about the growth from here?
Speaker Change: way more in terms of driving performance for our customers and driving our top-line and most importantly our margin as well at the same time. So the 30% is going to go up but most importantly the quality of the innovation pipeline is going to be much better.
Speaker Change: Thank you very much.
Speaker Change: Our next question is from the line of Ashish Sabhadra with RBC Capital Markets. Pleased to see it's your question.
Ashish Sabhadra: Thanks for taking my question. I was just wondering how should we think about the benefits of the growth investments and frontline digital technology and service capabilities as we approach fiscal year 2025 in terms of like the pricing tailwinds or volume growth but also operating efficiencies or any incremental color. Thanks.
Speaker Change: So, the best way to think about it, Ashish, is that it's fueling, obviously, our acceleration towards the 5 to 7, helping us get, obviously, so to the 20% ROI margin over the next three years, as mentioned, and it's three components. One is to save firepower, more people on the street, more efficient at doing it as well. Second, it's digital technologies, and third, it's service capabilities, like the One Ecolab initiative that you heard, as well, so from Scott, a little bit early on as well. But what's important is we make those investments while driving a net productivity improvement as well at the same time.
Speaker Change: That's why I shared with you a little bit the numbers here. We think about in the years to come, 20 to 30 basis points of our sales.
Speaker Change: in growth investment in the years to come and still getting 20 to 30 basis points of SGNA productivity improvement.
Speaker Change: while we do that. So the improvement is a net of the investments that we're making, so you get good to applying evolution and at the same time an EPS in line so with the 12 to 15 leading us to the 20% over the next three years.
Speaker Change: That's great, Kallai. Thank you. Thanks, Christian. Thank you, Ashish.
Speaker Change: Our next question is from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Kevin Mccarthy: Yes, good afternoon. Christophe, I was wondering if you might hit the reset button for us as it relates to health care and life sciences.
Kevin Mccarthy: So now that you've closed the GSS divestiture, how would you characterize organic sales growth prospects and margin uplift prospects for 2025 and beyond?
Speaker Change: So, two different businesses, healthcare and life sciences, as you said, so with the reset, we're going to separate that as well, so in 2025 and beyond, that you have more clarity as well, so about those.
Speaker Change: two businesses, especially Life Sciences. Honestly, healthcare is becoming a pretty small business after the divestiture. It's very close to the institutional team as well, since they're leveraging the same sales force, especially in the United States. And I'm very pleased with the evolution that we're having here.
Speaker Change: build a new proposition around instrument reprocessing, as I've shared with you, as the next step on the healthcare journey. We did
Speaker Change: The first step was driving cost to the right place. Second, this bifurcation of surgical and infection prevention. Third, the sale of surgical drapes. And fourth is to rebuild or to build the instrument reprocessing business for the future. We have a nice...
Speaker Change: to start with in Europe on that, and that's going to be the base that we're going to build on in the years to come. But still, it's going to be a smaller business.
Speaker Change: We've made that bet since 2016, 2017. It's a great business in a great end market. I believe that it's gonna be a booming business in the next five to 10 years. The industry is in a transition phase right now after the complicated years of COVID. We've been growing slightly. My ambition was to grow double digit. Well, we've been low single in that business while most of the competition was down, by the way. So it doesn't make me feel good, but certainly better than the trends that we've seen in other campaigns.
Speaker Change: in this business as well. But when I look at what we're doing, how we're building that business, as I've said, so we're close to a billion today. I expect that business in the next five to 10 years to be a few billions at margins that should be so in the 30 range, if not more than 30 as well. We're building towards that. I like a lot of progress that we're making. The speed at which we're gonna get there, well is also a bit depending on the market, but generally this is an investment I like.
Speaker Change: And the more I look at it, the more I understand. So the opportunity out there, the more I like it. And I think that we're all going to love that business down the road.
Speaker Change: Thank you very much.
Speaker Change: Our next question is from the line of Andres Castanos with Berenberg. Pleased to see you with your question.
Andres Castanos: Hi, actually following up on healthcare, you just consolidated a business that was making 20% margin and you are expanding margins quarter on quarter despite that. So can you help us understand that, what has gone well and what is turning around within healthcare?
Speaker Change: So the margin you were talking about was a combination of healthcare and life science, as mentioned before. So it's a combination of two very different businesses. One is serving hospitals and the other one is serving, obviously, the pharma industry and biotech, which is pharma as well. So, obviously, we'll have, so if I look at today, so post the sale of surgical drapes.
Speaker Change: Our healthcare business is kind of a break-even type of business. We knew that, so no big surprise, but it's a very
Speaker Change: Ecolab, institutional-like type of business, so we know how to get to a better place. It requires work, time, and some investment to get to the right place, and this is a playbook that we're familiar with. I like where we're going and we're going to get to the right place, but again, it's less than 5% of the company, so it's a very small business over there, but we
Speaker Change: focused on what we had in the past.
Speaker Change: a business in the years to come and healthcare really focusing on building a highly quality business which will remain relatively small in the years to come.
Speaker Change: Thank you. Our next question is from the line of Mike Harrison with Seaport Research. Please receive your question.
Speaker Change: Hi, good afternoon. Hi, Mike.
Mike Harrison: Christophe, I'm curious about the recent hurricanes and whether you saw any impact on your institutional or specialty businesses.
Mike Harrison: Can you quantify any drag that you saw in Q3 and would you expect that to worsen in Q4 or be similar?
Christophe Beck: Well, I don't know what's going to come in Q4, Mike, obviously, so I can't talk about events that haven't happened yet. But we've gotten...
Christophe Beck: Very good at that. I'm always heartened, obviously, with the human impact of those situations.
Christophe Beck: on our teams, and more broadly, we had a plant in Asheville as well, you've heard them in the news as well. But our supply chain team has become such a world-class team.
Christophe Beck: that is so resilient, so well organized in addressing whatever can happen in the environment of the market out there that ultimately we haven't seen anything in the third quarter from
Christophe Beck: from a business perspective.
Christophe Beck: a human impact obviously but not on the business side. We've become so much better from a resilience perspective that I feel quite good with whatever can happen out there assuming it's something that's in in a normal range obviously and even those more extreme situations around the world I've been really pleased with the way we could deal with them. When you think about it, 92%
Christophe Beck: of our sales are produced locally.
Christophe Beck: in a place like in China, it's 99%, for instance, as well. And that whole evolution of producing locally for local markets not only has been better from a performance perspective, but it has risen as well our resilience levels in dramatic ways.
Christophe Beck: Didn't used to be a huge competitive advantage in the past. Today and tomorrow, supply chain is a huge competitive advantage that we have as a company and our customers recognize that every single day, especially in extreme times, because we're always there for them. We'll never let them down.
Speaker Change: Thank you. The next question is from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Vincent Andrews: Thank you. Christophe, can I ask you, you know, if you think about your market share gains, whether it's new business wins or increased share of wallet, maybe compared to the beginning of the year or this time last year, however, you think is more sensible, how would you characterize them in terms of their pace of acceleration? And are you doing better, more with wallet share gains or with new business wins? Or is it about the same?
Christophe Beck: Well, it goes a bit together. When we have a share of Wallet, that's an increased market share as well because we're taking it.
Christophe Beck: competition by definition, but we try as well to get to new incremental type of offering. The example I was giving before on data centers and microelectronics where we use and recycle, well those are applications that customers do not have today, so that's an incremental sale, that's not the share gain because they end up buying from someone else, which is where we focus.
Speaker Change: which is the focus of One Ecolab. Well, it's WalletShare, obviously, because those are sales that are being generated by competition.
Speaker Change: so far. I like a lot the progression that we have, the fact that our top line is healthy, our volume is improving as well. In many markets where demand is not exactly accelerating, if anything it's staying kind of stable out there, so for me our share gains are improving over time and if I look as well at our new business generation, very healthy as well. That's a good indication for what's to come down the road and as mentioned before, our innovation pipeline which helps us sell as well to customers is stronger than it's ever been as well at the same time. Good indications for the future as well.
Speaker Change: Good evolution from a shared gain perspective the last 12 to 18 months and good indication for the quarters to come as well with those leading indicators of new business and innovation.
Speaker Change: One is not materially stronger than the other in terms of weight indicator.
Speaker Change: The new business is the closest, obviously.
Speaker Change: You get new business, thanks to innovation, as well at the same time, so we don't measure them so separately like that. They some double count if you just, you can't add both of them and to say that's the whole pipeline that we have down the road. But the fact that both are at record levels.
Speaker Change: is a very good indication that we can maintain our sales momentum and accelerate it, as I was sharing before.
Speaker Change: Thank you very much.
Speaker Change: Our next question comes from the line of Charles Niever with Piper Sandler. Please just state your question.
Charles Niever: Thanks for taking my question. Just a couple quick things. One, in terms of the fact that oil pricing has dropped quite a bit lately and may continue to drop a little bit more,
Speaker Change: When people are looking for savings and the savings that you can offer them on the energy side, does that drop, will that drop affect your ability to raise pricing further than it might have otherwise gone? Meaning at higher oil prices, the value you save them is bigger, so therefore price hikes would be bigger. So is this sort of a little bit of a problem in terms of how far you can raise pricing? And secondly, can you talk specifically about Europe? And so, you know, we know it's slow, we know the economy is slow, but is there anything specific? Is it Asian imports? Is there anything
Speaker Change: happening in Europe that is specifically
Speaker Change: sort of hindering your ability to grow at a better pace, you know, and will it change or can it change in your, obviously, in your favor?
Speaker Change: Thank you.
Speaker Change: So, two different questions, obviously here, so Charles, so first on pricing, well the best indication is what happened the last 12 to 18 months, where raw material costs were tailwind for us and we still, it delivered some very strong value pricing.
Speaker Change: because we are delivering so much total value delivered.
Speaker Change: The most important thing is that the cost is PVD as mentioned before. So to our customers, ultimately for them, well, it's PVD minus price, if it's a net positive. So for the customer, usually it works well. And that's what we demonstrated over the last two years. So we've demonstrated that even in environments where delivered product cost is a.
Speaker Change: tailwind, we can generate value pricing as well at the same time. Well, when it becomes.
Speaker Change: The headwind, as we expect it to be sometime in Q4 and certainly in 2025, well, the whole discussion of value pricing is even more important, obviously, here. So I feel
Speaker Change: reasonably good at delivering the value pricing in the next few quarters and years to come because we've been able to deliver a very strong value pricing in a easier environment from a DPC perspective, while in a more difficult one in the future it should not make it harder but it should make it slightly easier. Selling pricing is never something easy so I want to be careful how I'm saying that as well at the same time.
Speaker Change: But generally, so that's why I feel really good about 2025, because we have so good volume growth, we have steady value pricing, DPC is probably going to become as a headwind, we have good productivity, but the combination of all four together puts us in a very good place to deliver this 12 to 15% in 2025, no matter what.
Speaker Change: which is something that we've practiced over the last few years. So we know how to manage that and we'll keep managing it well going forward.
Speaker Change: Thank you. Our final question is from the line of Scott Sneeberger with Oppenheimer. Pleased to see you with your question.
Speaker Change: that that may influence that as well. Thank you.
Speaker Change: Bye.
Speaker Change: You know, the retention rate, which is close to 95%, it's been true for a very long time as a company.
Speaker Change: So, retention, very stable, volume, strengthening, pricing, strengthening, as well at the same time. So, kind of a very good balance of all drivers here. So, at the end of the day, I feel really good with the momentum that we have as a company. As mentioned to Tim at the beginning, very broad-based across businesses, across geographies, with Europe being the tougher place. It's always going to be the case. I've been living there for half of my life.
Speaker Change: of all our shareholders. So, that would be in summary how I would look at it.
Speaker Change: 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 and participation. Hope everyone has a great rest of the day.
Speaker Change #100: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.