Q2 2025 Ecolab Inc Earnings Call
Operator: Ecolab's second quarter 2025 earnings release conference call. At this time, all participants are in listen-only mode. The question and answer session will follow today's formal presentation.
Greetings, welcome to the Ecolab second quarter 2025 earnings release conference call.
At this time, all participants are in listening mode.
Operator: If anyone should require operator assistance during today's conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded.
Question and answer session will follow today's formal presentation.
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Andy Hedberg: At this time, it is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations. Andy, you may now begin the presentation. Thank you and hello, everyone, and welcome to Ecolab's second quarter. With me today are Christophe Beck, Ecolab's 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 Ecolab's website at ecolab.com.
As a reminder, this conference is being recorded.
At this time, it is now my pleasure to introduce your host, Andy Hedberg, Vice President of Investor Relations.
Andy, you may now begin the presentation.
Thank you. And hello everyone, and welcome to Ecolab's second quarter conference call.
With me today are Christophe Beck, Chairman and CEO, and Scott Kirk, our CFO.
A discussion over our results, along with
our earnings release.
Andy Hedberg: Please take a moment to read the cautionary tale. which state 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 the risk factors section in our most recent form. and our quotes and materials.
Supplies referencing, the quarter results are available on Eagle Labs' website at EagleLab.com, investor.
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.
These are forward-looking statements, and actual results could differ materially from those projected.
Andy Hedberg: We also refer you to the supplemental do-it-yourself earnings per share.
Christophe Beck: With that, I'd like to call, turn the call over to Christophe Beck. Thank you so much, Andy, and welcome to everyone joining us today. The Ecolab team delivered another very strong quarter. Once again, very consistent with our guidance. Our team's relentless focus on execution and delivering exceptional value to customers enabled us to achieve double-digit earnings growth despite the unpredictable global operating environment. Organic sales continue to grow strictly led by strong value pricing, solid momentum in our core business driven by a one Ecolab strategy that's working really well and fueled by breakthrough innovation, as well as steady strong performance from our growth.
The differ I described under the risk factor section in our most recent Form 10-K and our posted materials. We also refer you to the supplemental due to earnings per share information in the release.
with that, I'd like to
turn the call back for Discount.
Thank you so much, and welcome to everyone joining us today. The Collab team delivered another very strong quarter, once again very consistent with our guidance.
Relentless focus on execution and delivering exceptional value to customers enables us to achieve double-digit earnings growth despite the unpredictable global operating environment.
Organic sales continued to grow 3%, led by strong value pricing. Solid momentum in our Core Business is driven by a 1E collapse strategy.
Christophe Beck: This good momentum more than overcame an even end market demand, particularly in our paper and basic industries businesses, which represent only 15% of Ecolab's total sales. In other words, the remaining 85% of our business grew organic sales 4% and operating income by 18%, reflecting our broad and resilient business portfolio. This is a major strength of Ecolab, allowing us to deliver superior performance in good, like in more challenging times.
That's working really well and is fueled by breakthrough innovation as well as steady strong performance from our growth engines.
This good momentum more than overcame market demand, particularly in our paper and basic industries businesses, which represent only 15% of Vehicle App's total sales.
Christophe Beck: Now let's spend a few minutes on our key growth drivers and talk about why I remain very confident about our future in 25, in 26 and beyond. First, on value price. It continues to build in the second quarter, increasing just 2%. This growth is supported by increasing value that our technologies and services bring to customers as we help to deliver best-in-class business outcomes, operational performance, and environmental impact. During the second quarter, we also began implementing our trade surcharge for all customers in the United States only. Given the dynamic international trade environment, this surcharge, coupled with the expertise of our world-class supply chain team, enables us to reliably supply our customers while delivering value that exceeds the total price increase.
In other words, the remaining 85% of our business grew organic sales 4% and operating income by 18%, reflecting our broad and resilient business portfolio. This is a major strength of Ecolab, allowing us to deliver superior performance in good times and in more challenging times. Now, let's spend a few minutes on our key growth drivers and talk about why I remain very confident.
About our future in 2025, in 2026, and beyond.
First on value price.
It continued to build in the second quarter, increasing to 2%. This growth is supported by the increasing value that our technologies and services bring to customers. As we strive to deliver best-in-class business outcomes, operational performance, and environmental impact.
During the second quarter, we also began implementing our trade search chart for old customers in the United States.
Only.
Given the dynamic international trade environment, it is so charged.
Christophe Beck: With this now in place, we expect our total pricing to strengthen closer to 3% in the third and the fourth quarter.
Coupled with the expertise of our world-class supply chain team, we are able to reliably supply our customers while delivering value that exceeds the total price increases.
Christophe Beck: Next, the growth in our core segments, like institutional and specialty, and global water. Well, both continue to progress very well. In institutional and specialty, we continue to drive robust share gains, allowing us to continue to outperform the industry, while overcoming the headwind created by the strategic decision to exit the non-core, low-margin business. These exits, which are mostly in our hospitals and retail businesses, are causing a 1 to 2 percentage point drag on institutional specialty second quarter growth. But they're also helping us to further enhance our focus on the most critical customers and, at the same time, to further improve our long-term margin profile.
With this now in place, we expect our total pricing to strengthen closer to 3% in the third and fourth quarters.
Next, the growth in our course segments, like Institutional, Specialty, and Global Water.
While both continue to progress very well in institutional and specialty, we continue to drive robust year-over-year gains, allowing us to continue to outperform the industry. We are also overcoming the headwind created by the strategic decision to exit a few non-core, low-margin businesses.
Christophe Beck: So all in all, a very good story. In global water, performance was led by food and beverage, which accelerated to 3% organic growth by executing very well on our One Ecolab Growth Strategy that provides customers with a comprehensive hygiene and water offering that actually no one else can truly provide. This strength more than offsets the softer performance in more difficult end markets in paper and basic industries, as mentioned. Excluding these businesses, global water sales growth accelerated to 4% and operating income grew double.
The exits, which are mostly in our hospitals and retail businesses, are causing a 1 to 2 percentage point drag on institutional specialty in the second quarter. However, they are also helping us to further enhance our focus on the most critical customers and, at the same time, to further improve our long-term margin profile.
So, all in all, a very good story in Global Water performance was led by Food and Beverage, which accelerated to 3% organic growth by executing very well on our 1 E collaborative strategy. This strategy provides customers with a comprehensive hygiene and water offering that no one else can truly provide.
Christophe Beck: Finally, Ecolab's growth engines, which include pest elimination, life sciences, global high-tech, and Ecolab Digital, continue to perform exceptionally well. Collectively, these businesses make up nearly $3 billion of Ecolab's annual sales and grew double digits in the second quarter. Best Elimination Organic Sales Growth Accelerated to 6%, benefiting from our One Ecolab Growth Strategy and also the shift to our Digital Past Intelligence Model. As expected, operating income margins increased sequentially to nearly 20%. And as we continue to deploy best intelligence in the next coming years by leveraging our major digital capabilities, we expect to generate steady, strong sales growth and very attractive operating income margin expansion.
The strength is more than enough for the software performance in more difficult markets and basic industries. As mentioned before, excluding these businesses, Global Water's sales growth accelerated to 4%, and operating income grew in double digits.
Finally, he collapsed growth engines, which include Best Elimination, Life Sciences, Global High-Tech, and Eagle Up Digital, continue to perform exceptionally well collectively. These business lines make up nearly $3 billion of Ecolab's annual sales and grew double digits in the second quarter.
Best elimination: Organic sales growth accelerated to 6%, benefiting from our Eola growth strategy and the shift to our digital past intelligence model.
As expected, operating income margins increased sequentially to nearly 20%.
Christophe Beck: Life Sciences grew mid-single digits, led by strong double-digit growth in biopharma as well as in core pharma and personal care, while performance in water purification was partially impacted by shorter-term limitations in production. And we are at full capacity. Also, Hawaii grew significantly, benefiting from the strong growth in our high-margin biopharma business. We expect reported OI margins to stay in the mid-teens as we invest further to fuel this long-term, high-growth business with OI margin potential of 30%. Also, our global high-tech business continues to grow very rapidly, with sales up over 30% and operating income margins exceeding 20%.
And as we continue to deploy best intelligence in the next coming years by leveraging our major digital capabilities, we expect to generate steady, strong sales growth and very attractive operating income margin expansion.
Life sentences drew mid single digits, led by strong double-digit growth in Bio as well, as in Core Pharma and Personal Care. While performance in Water Purification was partially impacted by shorter-term limitations in production, we are at full capacity.
We expect to report why margins stay in the meetings. As we invest further to fill this long-term, high-growth business with an operating margin potential of 30%.
Christophe Beck: We're just at the beginning of this incredible growth story, but this is one we will own by leveraging our vast expertise in cooling for data centers and water circularity solutions for microelectronics production. And finally, Ecolab kept accelerating sales growth to nearly 30% in the second quarter, reaching an annualized run rate of $380 million, driven by rapid growth in subscription revenue and digital hardware. This exceptional performance, combined with value price and share gains across the businesses, drove a 170 basis points increase in Ecolab's second quarter operating income margin. While commodity costs are anticipated to keep increasing by low to mid-single digits in the second half of the year and into 2026, we expect our operating income margin to continue to expand at steady levels due to growth in high margin businesses, value price, share gains, and productivity improvements.
Also, our global high-tech business continues to grow very rapidly, with sales up over 30% and operating income margins exceeding 20%, with just the beginning of this incredible growth story. But it is one we will earn by leveraging our vast expertise in cooling for data centers and water circularity solutions for microelectronics production.
And finally, Ecolab Digital kept accelerating sales growth to nearly 30% in the second quarter, reaching an annualized run rate of $380 million, driven by rapid growth in subscription revenue and digital hardware.
This exceptional performance, combined with value price and share gains across the businesses, drove a 170 basis point increase in Nicholas's second quarter operating income margin.
When commodity costs are anticipated to keep increasing by low to mid single digits in the second half of the year and into 2026, we expect our operating income margin to continue to expand at steady levels due to growth in high-margin businesses.
Christophe Beck: In total, we continue to expect our full year 2025 operating income margin to reach a solid 18% on our path to deliver a 20% high margin by 2027.
Christophe Beck: And as mentioned, we will not stop. Looking ahead, most business fundamentals seem to be trending up, which provides me with the confidence to deliver 12 to 15% adjusted EPS growth for the quarters to come in 2025 and into 2026, as we also keep investing in our growth and Our experience in navigating past micro-challenges has only strengthened our capabilities and agility. With our diversified portfolio, record innovation pipeline, strong growth engines, and focused execution, we have plenty of options and levers to deliver on our commitments in almost any environment. Our unique ability to provide innovative solutions that drive best-in-class outcomes, enhance operational performance, and conserve vital resources like water and energy for all our customers is crucial, or more crucial than ever.
Value price, share gains, and productivity improvements in total. We continue to expect our full-year 2025 operating income margin to reach a solid 18% on our path to deliver a 20% margin by 2027. As mentioned, we will not stop there.
Looking ahead, most business fundamentals seem to be turning up, which provides me with the confidence to deliver 12% to 15%. Adjusted EPS crawls for the quarters to come in 2025 and into 2026, as we also keep investing in our growth engines.
Our experience in navigating past micro challenges has only strengthened our capabilities and agility.
With our diversified portfolio, recorded innovation pipeline, strong growth engines, and focused execution, we have plenty of options and levers to deliver on our commitments in almost any environment.
Christophe Beck: With a strong and resilient free cash flow, an extremely strong balance sheet, and a super low leverage ratio of 1.7, we are very well positioned to capitalize on both organic and inorganic growth opportunities. These strong foundations enhance our ability to create significant value for our customers and drive attractive returns for our shareholders.
A unique ability to provide innovative solutions that drive best-in-class outcomes and enhance operational performance while conserving vital resources, like water and energy, for all our customers is crucial—more crucial than ever.
With a strong and resilient free cash flow, an extremely strong balance sheet, and a super low leverage ratio of 1.7, we are very well positioned to capitalize on both organic and inorganic growth opportunities.
Christophe Beck: I therefore remain very confident in our ability to deliver sustained, strong performance in 2025 and beyond. So thanks again for your continued trust and your investment in Ecolab. I look forward to your questions. Thanks Christophe.
The strong foundations enhance our ability to create significant value for our customers and drive attractive returns for our shareholders. I therefore remain very confident in our ability to deliver sustained, strong performance in 2025 and beyond. So thanks again for your continued trust and your investment in Ecolab. I look forward to your questions.
Operator: That concludes our formal remarks.
Operator: One final note before we begin the Q&A.
Andy Hedberg: As a reminder, we will be hosting our Investor Day on September 4th in Minnesota, where Ecolab Senior Leadership will be hosting the Q&A.
Andy Hedberg: Provide an in-depth review of the company's strategy to drive strong growth and attractive markets. This event will also include interactive sessions showcasing Ecolab's latest breakthrough innovations.
Thanks, Kristoff. That concludes our formal remarks. Final note: Before we begin Q&A, as a reminder, we will be hosting our Investor Day on September 4th in Minnesota for Eagle Labs. The senior leadership team will provide an in-depth review of the company strategy to drive strong growth and attractive margin expansion.
Operator: Please contact me if you have any questions. With that, operator, would you please begin the question... Thank you. If you would like to ask a question at this time, you may press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question per caller, so that others will have a chance to participate.
This event will also include interactive sessions showcasing Ecolab's latest breakthrough innovations. Please contact me if you're interested in joining us.
With that, operator, would you please move into the question-and-answer period?
Thank you.
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Operator: One moment for our first question.
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1 moment for our first question.
Tim Mulrooney: Our first question is from the line of Tim Mulrooney with William Blair. Please receive your question. Christophe, Scott, good afternoon. Good afternoon, Tim.
Our first question is from the line of Tim Moron with William Blair.
This is your question.
Kristoff Scott, good afternoon.
Good afternoon.
Christophe Beck: Yeah, so for my question, I wanted to ask, you know, I think some folks were thinking maybe that you would raise your guide or maybe the low end of the guide a little bit this quarter. So even though the second quarter came in line with expectations, I think some folks were maybe expecting a little bit more for the second half of this year. Can you just walk us through the puts and takes here? Is there maybe some conservatism being baked in here? Or is there maybe something else that I'm not seeing? Thank you. Hey, thank you, Tim.
Yes. So for my question, um, I wanted to ask, you know, I...
I think some folks were were were thinking maybe that you would raise your your guide or, or maybe the the low end of the guy a little bit this quarter. So so even though the second quarter came in line with expectations I think some folks were maybe expecting a little bit more for the the second half of this year. Can you just walk us through the puts and takes here, is there is there? Maybe some conservatism being baked in here or is there maybe something else that I'm not seeing? Thank you.
Christophe Beck: It's actually a combination of both conservatism and at the same time, investing further in our growth. 13% growth on earnings for the second quarter, guiding these 12 to 15 for the second half and beyond. For me, this is the commitment I've made to all of you guys, and this is where I want to make sure that at least I deliver that. Actually, I really like where we are right now. So we have good momentum, which as mentioned, 85% of our business growing, 4%. And the growth engines, the one I mentioned before, that represent close to $3 billion in sales, well, they're growing double digits.
Christophe Beck: So our investments in growth are really working. Second, the macro trends around water for AI infrastructure, purification for life sciences, and productivity for hospitality and best intelligence, well, they're all trending in our favor. It is a good thing. And our business fundamentals of new business, innovation, value price, productivity, they're all trending in a positive direction. So I'm with you. I feel good about where we are, where we're going, about the second half, and for 2026 and beyond.
13% growth, uh, on earnings. So for the second quarter, guiding these 12 to 15 for the second half and beyond for me, this is the commitment I've made to all of you guys and this is where I want to make sure that at least. Um, I delivered that actually well really like uh where we are right now. So we have good momentum with as mentioned 85% of our business growing 4% and the growth engines, the 1 I mentioned before uh that represent close to 3 billion in sales. Well they're growing double digits. So our investments in growth um are really working. Second in the micro Trends around water, for AI infrastructure, purification for life sciences, and productivity for hospitality and and best intelligence. While they're all training in our favorites is a good thing and our business, fundamentals of new business, Innovation value price productivity, they they all trending in a positive direction. So I'm I'm with you. Um,
Christophe Beck: As we know, the world is a bit of a complicated place, and we honestly always build some room for the unexpected. And the last few years, while we had plenty of this, and some could call it conservatism, for me, is making sure I can deliver what we've promised. And secondly, we keep investing more in our growth engines to fuel this long-term momentum in life science, in data centers, in labs, in pest intelligence, in Ecolab, digital, and ultimately, this will keep paying dividends in the long run for all of us. So bottom line, I think we're in a very good place.
I still got about where we are, where we’re going about the second half and for 2026 and beyond, but.
As we know, the world is a bit of a complicated place. Um, and we honestly always built some room for the unexpected. The last few years, while we had plenty of this, um, and some could call it conservatism, for me it is making sure I can deliver, um, what we've promised. And secondly.
Christophe Beck: Any overdelivery that we will get in the quarters to come and years to come will be shared between returns for incremental returns for investors and incremental investments in our growth businesses. So, all in all, I think it's a win-win for the company and for investors as well at the same time. For me, as I've mentioned, this 12 to 15 is not an ambition, it's a commitment, and anything that comes above will be a combination of returns and investment.
We keep investing more in our growth engines, um, to fuel, uh, this long-term momentum in life science in data centers in Fabs, in past intelligence in nikelab digital. And ultimately this will keep paying dividends um, in the long run, uh, for all of us. So, bottom line, I think we're in a very good place. Um, and
Any other delivery that we will get in the quarters to come and years to come? Um, will be shared between returns. Um, for, I mean, incremental returns for investors and incremental Investments, um, in our growth businesses. So all in all, uh, I think it's a win-win um for the company and uh for investors as well at the same time for me, as I've mentioned these 12 to 15 is not an ambition. It's a commitment and anything that comes above will be a combination of returns and investment in our growth.
Manav Patnaik: Our next question is from the line of Manav Patnaik with Barclays. Please receive your question. Thank you, Christophe, I just wanted to touch on, you know, pricing and, you know, from a volume perspective, obviously, as you mentioned, there was, you know, an uncertain place, etc.
Our next question is from the line of Manaf Pontiac with Sparkles. Please go ahead with your question.
Christophe Beck: Just can you help us dig through what you're hearing what you're seeing on the pricing front, I think, you know, the 2%, I believe, was supposed to be two and a half to maybe a bit higher, if you could just talk about what we should expect in the second half with and without the surcharge pricing that you have coming in. Yeah, thank you, Manav. I like a lot where we are on pricing. And keeping in mind, it's value pricing, we've made that commitment to customers as well, that we will always deliver more value, which means cost savings in the operations than the incremental price they're paying for us.
Thank you, good, uh, Christophe. I just wanted to touch on, you know, pricing. I understand, you know, from a volume perspective. Obviously, as you mentioned, there was, you know, an uncertain place, etc. Just can you help us, uh, dig through what you're hearing? What you're seeing on the pricing front? I think, you know, the 2% I believe was supposed to be 2.5% to maybe a bit higher. If you could just talk about what we should expect in the second.
Path with and without the search charge pricing that you have coming in.
Christophe Beck: It's kind of a value share. That's the important component of how we think about pricing in our company. So 2% in Q1, 2% in Q2, starting the US trade surcharge as well in the second quarter. So far, so good, but it's always a start during the quarter you announce it. So for Q3, Q4, I expect pricing to move closer to Q3. So I don't know exactly where we're going to land in Q3, but in Q4, it's going to be, it's going to be 3, hopefully will be 3 or close to 3 as well in Q3, but all trending up.
Yeah, thank you man up. Uh, I like a lot, so, where we all, uh, on pricing and keeping in mind, its value pricing. We've made that commitment to customers as well, that we will always deliver more value, which means god Savings in the operations than, uh, the incremental price. They paying for us, it's kind of a value share. Uh, that's the important, uh, component of how we think about pricing, um, in our companies, so 2%, um, in in q1, uh, 2%, in in Q2 starting the US trade search charge as well, in the second quarter, so far, so good. But it's always the start, uh, during the quarter, um, you announce it. So, for Q3 Q4, um, I expect pricing to move closer to to, uh, to 3. Um, so I don't know exactly where we're going to land in Q3, but in Q4 it's going to be, uh, it's going to be 3. Uh, hopefully will be 3 or close to 3, as well. Um, in Q3
Christophe Beck: And again, backed by the value delivery for our customers. And what's most important is that the retention of our customers, which is something that we look at very closely, is getting stronger, as well at the same time. And as you've seen, the volume is positive as well, especially strong in our growth businesses. So all in all, it's working well.
But all training, yeah, and again backed by the value delivery. So for our customers, what's most important is that the retention of our customers, which is something that we look at very closely, is getting stronger. As well as at the same time, and as you see in the volumes, positive as well, especially strong in our growth businesses. So all, you know,
No, um, it's working well and I see value price as a good revenue stream at 100% margin for us, in ways that are driving savings in our customers' operations at the same time. So it's working really well.
Ashish Sabadra: Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please receive your question. Thanks for taking my question. So just wanted to focus on the pest elimination business where we saw an improvement. Can you talk about some of the efforts around pest intelligence, how those rollouts are coming together, and how should we think about the puts and takes for growth going forward? Thanks.
Next question comes from the line of Ashish Sabadra with RVC Capital Markets. Please receive your question.
So I just wanted to focus on the best elimination business where we saw an improvement. Can you talk about some of the efforts around pest intelligence, how those rollouts are coming together? And how should we think about the puts and takes for growth going forward? Thanks.
Christophe Beck: Thank you, Ashish. We love that business. Pest Elimination is just an unbelievable story, which will shift towards pest intelligence over the next few years. It's not going to take forever, but we're going to move from pest elimination, the business that we have today, with our people going and visiting every location and looking at every device at our customers' locations, which are millions around the world, to pest intelligence, where most of it is going to be done 24-7, remotely, with our team, ultimately. So going to the places where they can add value and not taking devices.
Christophe Beck: mousetraps that are in We are on an unbelievable journey with that. The huge advantage we have is that as Ecolab, well, we have massive capabilities in digital, in sensing technology, the Ecolab 3D clouds. We have all it takes to put that into practice in our first elimination business. As I've shared with some of you as well, the last few months we've concluded one of the major retailers here in the US, which was our pilot, making sure it was working from a technology perspective, from a model perspective. And interestingly enough, when we think about the pest-free ratio, the industry is at 92% today, which means 92% of the customer locations are pest-free.
Thank you. Um, we love that business. Uh, best elimination is just an unbelievable story, uh, which will shift towards uh, test intelligence um, over the next few years. Uh, it's not going to take forever, but we're going to move from best elimination, the business that we have today, um, with our people going and visiting um, every location and looking at every device at our customers' locations, uh, which are millions, uh, around the world to get intelligence, where most of it is going to be done 24/7 remotely with our team. Ultimately, so going to the places where they can add value, uh, and not subjecting devices means mouse traps um, that are, uh, empty.
We are on an unbelievable journey. Uh, with that, the huge advantage we have is that, as the collab, um, we have massive capabilities in digital and sensing technology. Um, the Ecolab 3D clouds, um, we have all it takes to put that into practice, um, in our, uh, first elimination business. Uh, as I've shared with some of you as well, uh, the last few months, we've concluded one of the major retailers. Um,
Here in the U.S., which was our pilot, making sure it was working from a technology perspective and from a model perspective. And interestingly enough, when we think about the...
Christophe Beck: The average for Ecolab is 95%, which is better. You still have 5% of the locations that are not pest-free. And that pilot that we deployed is showing that we can deliver 98%, trending to 99%. We'll never get to 100% because it's nature, obviously, but 99% seems to be the right number. So great outcome. The model is working. The customer is open and ready with the financial model as well at the same time. We're moving to a second retailer as we speak. The third one is lined up as well, so for the months to come, and will expand as well across all our end markets in the months and quarters to come.
Past 3 ratio. Um, the industry is at 92%, uh, today, which mean 92% of the customer locations are best free. Uh, the average for collab is 95%, uh, which is better. You still have 5% of the locations that are not
Christophe Beck: I think that whole business in the next few years is gonna become a full pest intelligence-based model with a new financial model, obviously, that's driving more growth, better margins, and most important, 99% pest-free environment for our customers.
Christophe Beck: So, a very good story.
Free, and that, um, pilot that we deployed is showing that we can deliver 98%, trending to 99%. We would never get to 100% because it's nature, obviously. But 99% seems to be, um, the right number. So, great outcome; the model is working. The customer is ready and is open and ready with the financial model as well. At the same time, we're moving toward a second retailer as we speak. The third one is lined up as well. So, for the months to come, we will expand across all our end markets in the months and quarters to come. I think that whole business in the next few years is going to become a full person in the religion space model with a new, um, financial model. Obviously, that's driving more growth, better margins, and most importantly, a 99% best free environment for our customers. So, a very good story.
John Mcnulty: Our next question is from the line of John McNulty with BMO Capital Markets. Please just use your question. Yeah, good morning or good afternoon. Thanks for taking my question, Christophe.
Our next question is from the line of John McNulty with BMO Capital Markets. Please go ahead with your question.
Christophe Beck: Can you help us to think about the delivered product costs that you saw in this quarter and how you're thinking about that as you go into the second half? It seems like there's kind of still a lot of moving parts around tariffs and headwinds around that raw materials, kind of some of them fading, some of them pushing higher. So can you can you help us to think about, think about those trends? Yes, John, a lot of moving pieces, to say the least. We've been used to that.
Yeah, good morning or good afternoon. Thanks for taking my question Kristoff. Um, can you help us to think about the delivered product cost that you saw in this quarter? And how you're thinking about that as you go into the second half? It seems like there's kind of still a lot of moving parts around tariffs and headwinds around that raw materials kind of some of them. Fading, some of them pushing higher. So can you, can you help us to think about um, think about those trends?
Scott Kirkland: Let me ask Scott just to start with the answer, huh? Yeah, absolutely.
Yes, John Moto. Moving pieces, to say the least. We've been used to that. Let me ask Scott just...
John Mcnulty: Hi, John. Yeah, on DPC, so similar to Q1 and Q2 commodities, so the market, if you will, was up low single digits, which includes the impact of tariff and tariff-related inflation, which we're seeing. But the net DPC was slightly favorable, as we've gotten efficiencies from our great supply chain team. So we expect the market, the commodity inflation, to be up that low single to mid-single digits in the quarters to come, ultimately depending upon the tariff impact. But we expect to continue to do better than this with the impact from our supply chain team, which we're seeing in the results of our gross margins being up 100-based.
Scott Kirkland: So the combination of supply chain doing an amazing work to get a net DPC that's favorable and value price, that's trending positively as well, is obviously driving a very positive equation for our margins, which is one of the reasons why our gross margins went up 100 basis points.
Yeah, absolutely. Hi John yeah, on DPC. So similar to q1 and Q2 Commodities. So the the the market if you will was up low single digits, which includes the impact of tariffs and tariff related inflation, which we're seeing, but the net DPC was slightly favorable as we've gotten efficiencies from our our great supply chain team. So we expect um, the market the commodity inflation, to be up that low single to Mid single digits in the quarters to come, ultimately, depending on on the Tariff impact. But we expect to continue to do better than this with the impact of our soft supply chain team, which we're seeing in the results of our gross margins being up a 100 basis points in Q2.
Scott Kirkland: Okay.
So the combination of uh, supply chain doing an amazing work, uh, to get a net DPC, that's favorable and value price. Um, the training positively as well. Uh, is obviously driving a very positive equation for our margins, which is 1 of the reasons why our gross margins went up 100 basis points again uh in Q2
David Begleiter: The next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your question. Thank you. Good afternoon. Christophe, on the U.S. surcharge, do you still expect to realize roughly half of what you announced? And are you seeing competitor support? for this surcharge.
The next question is from the line of David Biglighter with Deutsche Bank. Please proceed with your question.
Good afternoon. Uh, Christophe Beck, our CEO, do you still expect to realize roughly half?
Of what you announced, and are you seeing competitors support?
Christophe Beck: And lastly, why not anything on the international side in terms of a surcharge? So a few questions in there, David. So first, on competitors, they've announced a trade surcharge. I'm not in their books, obviously, so I don't exactly know what they're doing. The good thing is that we're gaining share, again, all of them, which is a good place to be. So good that they're all participating and that we're winning as well at the same time. The second, in terms of delivery, it's an imperfect science, as we know, but generally working, as you've heard. So from Scott, when we look at tariffs, increase of prices by local manufacturing concentration, our optimization in supply chain, plus the trade surcharge, it's a net positive.
In terms of the state charge, thank you.
So, a few questions in there. Um, David the First on competitors they've announced.
Trade, so charge.
Christophe Beck: And you see it in our margins, ultimately. So the mechanics work really well for us and for our customers, which is exactly where we want to be.
Christophe Beck: And the third part of your question, international, we have all it takes to get it done. It's just that today, as you know, those treaties with the economies around the world are unilateral. So it's a tariff you get when you import or you export to the U.S., not when the U.S. is exporting. So to other markets, at least we haven't seen those. The moment we see those, if there is a reciprocal action, so from any market out there, we have the mechanics. We know how to make it work. We've used it with the energy surcharge in 2022.
I'm not in their box obviously, so I don't exactly know, uh, what they're doing. Uh, the good thing is that beginning share, um, again all of them, uh, which is a good place to be, uh, so good that they're all participating, uh, and that we winning, uh, as well at the same time. The second, um, in terms of delivery, um, it's an imperfect, uh, science uh, as we know, but generally working, uh, as you've heard. So from Scott, when we look at uh, uh, terrorists, uh, uh, increase of prices by local, uh, manufacturing concentration, our um, optimization in supply chain plus, um, the the trade search charge. It's a net positive and you see it in our margins, ultimately. So the mechanics work, uh, really well for us and for our customers, which is exactly, uh, where we want to be and the third part of your question, um, International, uh, we have all it takes to get it done.
Christophe Beck: We can use it. So far, we don't have any reasons to do it. So we will not, obviously, use it as long as the tariffs remain as they are to export to other countries. Thank you.
It's just that today, uh, as you know, um, those 3DS, um, with, uh, the economies around the world, where are unilateral. Um, so it's a tower if you get when you import or you export to the U.S., not when the U.S. is exporting. So, to have a market—at least, we haven't seen those. The moment we see those, um, if there are reciprocal, um, actions from any market out there, we have the mechanic; we know how to make it work. We've used it. So, with the energy search charge in 2022, um, we can use it. So far, we don't have any reasons to do it, so we will not, uh, obviously use it, um, as long as the tariffs remain as they are, uh, to export to other countries.
Chris Parkinson: The next question is in the line of Chris Parkinson with Wolf Research. Please proceed with your question. Great. Thank you. Christophe, despite a pretty sluggish macro environment, your margins in institutional life sciences seem to be moving in the right direction. And on one hand, you've been talking about price, presumably productivity and portfolio rationalizations on the positives. versus, you know, presumably a still pretty sluggish macro and perhaps a little bit of gross spend on the opposite side of it.
Thank you. The next question is in the line of Chris Parkinson, with wolf research. Please just give us your questions. Great, thank you. Uh, Kristoff despite a pretty sluggish macro environment, uh, your margins and institutional Life Sciences. You know, seem to be moving in the, you know, the right direction. And on 1 hand, you've been talking about price, you know, presumably productivity and portfolio rationalizations on the positives.
Christophe Beck: But just, you know, in the context of the macro we're in, what do two key results tell you about your longer term opportunities by segment? Thank you. Great question, Chris. Well, what it's telling me is that it's working. Because INS has reached the highest level of margin they've never had in their history. This team is doing unbelievable work by really focusing on what customers need the most. And it's labor automation, labor optimization, whatever the words are. They have a hard time to get talent, and the talent they're getting is at a higher cost, which in a way is a good thing for the general environment, but not so much for the P&L of our customers.
Versus, you know, presumably a still pretty sluggish macro and perhaps a little bit of a growth spend on the opposite side of it. But just, you know, in the context of the macro we're in, what do two key results.
Tell us about your longer-term opportunities by segment. Thank you.
Christophe Beck: So when I look at automation solutions for our INS customers, it works for them. It helps them reduce their costs in dramatic ways, which means that we can get some of that value share in our value front. So that's good for us, good for them. At the same time, we're also leveraging technology within INS, really pleased with the The way INS is embracing digital technology, one Ecolab platform that we've developed for the whole company, for the whole INS as well at the same time, so we get an improvement as well at the same time from an operating performance perspective, which is really good.
Great question, Chris. Well, uh, what it's telling me is that it's working, um, because ins, uh, has reached, uh, the highest level, uh, of margin, uh, they've never had, uh, in the history. Uh, this team is doing unbelievable work by really focusing on what customers, uh, need the most, and it's labor automation, labor optimization, uh, whatever the words are. They have a hard time to get talent, and the talent they're getting is at a higher cost, which, you know, is a good thing for the general environment, um, but not so much for the P&L, um, of our customers. So, when I look at, uh, automation solutions of 4 Hour ins, um, customers, it works for them. It helps them reduce their costs in dramatic ways, which means that we can get some, um, uh, of that value share in, um, our value price. So, that's good for us.
Good for them, same time. Um, we also, uh, leveraging technology within, um, I'm really pleased with.
The way INS is embracing digital technology is through the Eola platform that we've developed for the whole company, for the whole INS.
Christophe Beck: And the third thing is that because of that, better service, better outcome, better productivity for our customers, we gain share as well at the same time. And you see the growth of INS is really good. It's even been impacted one to two points by those exits, as I mentioned before, which were private label businesses, which didn't have much to do with our service business, by the way. Well, we're gaining share, and that's showing that it's working. Customers like it.
Christophe Beck: So the combination of all three, gaining share, driving value for our customers, and driving operational performance within INS, well, next to the highest margin in our history in INS, and it's going to continue on that good trajectory, so for the quarters and years to come.
As well at the same time, so we get an improvement, uh, as well at the same time. Um, from an operating, uh, performance perspective, um, which is really good. And the third thing is that, uh, because of that, better service, better outcome, better productivity for our customers, we can share, uh, as well as at the same time, and you see the growth, um, of ins is really good. It's even been impacted 1 to 2 points by those exits. As I mentioned before, which were private label businesses, which didn't have much to do, uh, with our service business, uh, by the way, well, we gaining share. Um, and that's showing that it's working, get customers like it. So the combination of all through all 3 gaining share driving value for our customers and driving, uh, operational performance.
Good. Trajectory so.
For the quarters and years to come.
Vincent Andrews: Our next question is from the line of Vincent Andrews with Morgan Family. Thank you, and good afternoon, everyone. I'm wondering, Christophe, if you could speak a little bit to, I believe, in your prepared remarks, and please correct me if I'm wrong, you mentioned that you were maxed out on capacity in certain parts of the water business. So I'm just wondering if you could expand on that a little bit. And likewise, in PEST, it sounds like these customer trials are going extremely well. So I'm wondering, you know, sort of what the S-curve of the implementation of that new technology, your better mousetrap, so to speak, you know, what the timing and pace of that's going to be.
Our next question is from the line of Vincent Andrews with Morgan Stanley. Please receive your question.
Christophe Beck: And if there are any potential capacity constraints there that you need to get in front of.
Uh, thank you and good afternoon everyone. Um, wondering Christopher. If you could speak a little bit to I I believe in your prepared remarks and please correct me if I'm wrong. You mentioned, uh, that you're you're maxed out on capacity in certain parts of the water business. So I'm just wondering if you could expand on that a little bit and and likewise in past, it sounds like these customer trials are going, uh, extremely well. So I'm wondering, you know, sort of what the s-curve of the implementation of that new technology that your better mousetrap so to speak. Um you know what the the timing and pace of that is going to be and and if there are any potential capacity, constraints there that that you need to get in front of
Christophe Beck: Yeah, so two different businesses, obviously, so Best Intelligence with better mousetraps, which are truly better mousetraps. It feels easier to do than it truly is to get that working really, really well, millions of times around the world where we operate with best elimination and in the future, so Best Intelligence. We wanted to make sure it was working. Before we go too far, getting ahead of our skis and not delivering the value to our customers would not be the right thing to do. Obviously, so having one of those great retail partners, which is a reference point in the US, was exactly what we wanted to do, and it worked.
Yeah, so two different businesses, obviously. So, uh, best intelligence we have, better mousetraps, uh, which are truly a bit of our straps. Um, it feels easier, um, uh, to do it. And it truly is, uh, to get that working really, really well. Uh, millions of times, um, around, uh, the world where we operate. So we invest, um, in elimination and, uh, in the future. So best intelligence, uh, we wanted to make sure it was working. Um, before we go too far, getting ahead of our skis and not delivering the value to our customers would not be the right thing to do. Um, obviously, it's not having one of those, um, great retail partners.
Christophe Beck: And now we're getting second, and as mentioned, the third one as well.
Christophe Beck: I think it's going to take a few years. It's going to take less than five years, hopefully much less, but let's see, to shift the whole business towards Best Intelligence. We have a great team with a great leadership and customers that really love what's being done. At the same time, we have digital capabilities that none of our competitors do have. So that should be all positive, obviously, for us.
Uh, which is a reference point. Um, in the US was exactly um, what we wanted to do and it worked, and now we're getting second, and as mentioned, so to the third one as well. I think it's going to take um, a few years. It's going to take less than 5 years.
Hopefully, much less.
Let's see.
Christophe Beck: In life science, you're right. So we got some capacity limitations in our water business. So within life science, water purification, life science business, but not for the pharma business directly. Pharma, biopharma, as mentioned, is growing double-digit, very strong, very good. Really pleased to see that all the work that we've done over the past two, three years, since we acquired PureLight, ultimately is paying off and really looking for some really good momentum, and most importantly, great acceptance by our customers. And in the second quarter, so we had maintenance that was planned in one of our plans in Europe that limited how much we could produce there, and that had a slight impact on our production over there.
Um, to share the whole business towards, um, best intelligence. We have a great team with a great leadership, uh, and customers that really love, um, what's being done and same time, we have digital capabilities, that none of our competitors do have so that should be, um, all positive obviously. So, for us in in life science. Um, you're right, um, so we got uh, some capacity limitations um, in our in our world of business. So, within life science, what a
Application, it's a life science business, but not, um, for the farmer business, uh, directly farmer BioFarma, as mentioned. So, he's drawing double digits, very strong, very good. I'm really pleased to see that all the work we've done over the past 2 to 3 years since we acquired PureLight ultimately is paying off. We're seeing some really good momentum and, most importantly, great acceptance by our customers.
Christophe Beck: That plan, that's okay. We need to live with it. That's not much to do with demand, obviously, so kind of business.
And in the second quarter, we had maintenance that was planned in one of our plants in Europe. This limited how much we could produce there and had a slight impact on our production at that plant. That's okay; we need to live with it. That's not much to do with the business metrics and actual trends. Obviously, it's kind of business as usual.
Patrick Cunningham: The next question comes from the line of Patrick Cunningham with Citi. Please receive your question.
Next question, just a line of Patrick Cunningham city. Please see your question.
Scott Kirkland: Hi, good afternoon. Thanks for taking my question. You know, maybe just a related follow up there on water. And I think that operating income growth was rather modest relative to solid pricing growth and good underlying growth there. You know, I think you cited supply chain costs and unfavorable mix, but I think our assumption was some of these faster growing markets had better mix. So what was the source of that unfavorable mix?
I do. Good afternoon. Thanks for taking my question. Yeah, maybe just a related follow-up there on water. You know, I think the operating income growth was rather modest relative to, you know, solid pricing growth and good underlying growth there. You know, I think you cited supply chain costs and unfavorable mix, but I think our assumption was.
Some of these faster-growing markets had a better mix. So, what was the source of that unfavorable mix?
Scott Kirkland: Scott, do you want to answer that question? Yeah, happy to do it, Patrick. As Christophe noted in his opening, basic and paper have been a drag, and that water OI growth of 6% was all due to basic and paper. If you look at the water OI growth excluding both basic and paper, the sales were up 4% and the OI was up strong double digits.
Up, you want to answer that question? Yeah, I'm happy to do it. Patrick, as Kristof noted in his opening, Basic and Paper have been a drag, and that Water AI growth of 6% was all due to Basic and Paper. If you look at the Water OI growth excluding both Basic and Paper, the sales are up 4% and the OI was up strong double digits.
Shlomo Rosenbaum: The next question is in the line of Shlomo Rosenbaum with Cecil, please receive your question. Hi, thank you very much. If you don't mind, I'm going to ask a little bit more of a two-parter. First one is just on the organic growth. If we're kind of bouncing around at 3% and volume is only kind of 1% here, do you still have the same level of confidence on that operating margin target, especially if we don't start to see a material improvement in the volume side? And then just want to touch on what you said on PEST in terms of morphing the model, because we've had a couple quarters of growth that were lower than what we're used to seeing in that business.
The next question is in the line of schwa Rosen, bomb with Stifel. Your question.
Christophe Beck: Is part of the shifting the model giving you a near-term headwind to revenue growth in that business? Thank you.
Thank you.
Christophe Beck: Thank you, Shlomo. Yeah, two very different questions. So on best elimination, the short answer is yes. The shift towards best intelligence is not an obvious shift, it's a pretty significant shift. So within our organization, it's new technology, it's a new route model, it's a new financial model. It's a complicated piece, if I may say so, to make it work really well. And on top of it, as you said, to deal with, unfortunately, as well, caring about our team, that's so important for us. So, it was kind of behind us. Now, we keep investing on best intelligence because it's going to help us really lead that transformation in that industry in the U.S.
Thank you slowmo. Uh yeah, 2 2 very different questions so on uh on best elimination. The short answer is is yes. Um the the shift towards best intelligence is not an object shift. It's a pretty significant shift. So within our organization, these new technology, it's a new route model, it's a new financial model. Um, it's a complicated piece. Uh, if I may say so to make it work really well and on top of it, as you know, um,
Christophe Beck: and around the world, not just in terms of amount of devices, but in terms of type of technology and business model as well at the same time. So, it requires some investments, financial investments, but resources as well at the same time, which are people, obviously. So, doing that work generally feels good with the trajectory we have on the top line in terms of model as well. So, the 20% plus is going to just strengthen with that shift in model in best intelligence. So, generally, a very good story. Those transformations are never obvious, and it's not a straight line to heaven either, but great leadership team, great team executing very well.
we had a few incidents that we had to deal with unfortunately uh, as well, caring about our team. Uh, that's so important, uh, for us, uh, in the company. So, it was kind of a behind us. Uh, now we'll keep investing, um, on best intelligence because it's going to help us really lead that transformation in that industry, um, in the US, uh, and around the world, not just in terms of and amount of devices. But in terms of
Type of technology and business model as well at the same time so requires some investment uh, financially Investments, but resources um as well uh at the same time which are people obviously are doing that work. Generally you feel good with the trajectory we have um on the top line in terms of model as well. So the 20% plus is going to just strengthen um with that shift in model in best intelligence. So generally uh a very good story uh, those Transformations on ever obvious and
Christophe Beck: And as mentioned before, so, customers are very pleased with how it's working because at the end of the day, well, it's aiming to the 99% best free environment that matters. Now, to the first part of your question, my confidence to get the 20% by 2027 just keeps getting stronger. If we look at the second quarter, well, with top line growth of 3%, being able to deliver 13% earnings growth and operating income margin up 170 basis points. Obviously, it's kind of a demonstration of what accelerated growth could mean as well for the delivery of the company.
Christophe Beck: And as mentioned, so, we have two businesses, and there will always be a few businesses that are not exactly in a great place, but the strength of the portfolio we have as a company here, so this paper on basic industries, well, 85% of the company is growing 4%, and 20% of our growth engine are growing double digits as well at the same time, and that's where we invest. So, generally, the mix of growth is going to turn positive, and that's going to help us get... Closer to the 20% quicker as well at the same time.
It's not a straight line to have an either but great. Uh leadership team, great team, executing very well and as mentioned before, so customers very pleased with how it's working because at the end of the day, well, it's um, aiming to the 99% best free environment, that that matters now to the first part. Um, a few question, um, my confidence to get the 20% by 27. Uh, just keeps getting stronger. Uh, if we look at, um, the the second quarter, well with stuff, like growth of of 3%, being able to deliver 13%, um, earnings growth and um, operating income margin up 170 basis points. Um, obviously these are, it's kind of a demonstration of what accelerated growth could mean, um, as well. So for the delivery, uh, of the company, and as mentioned, so we have 2 businesses, um, and they will always be a few businesses, um, that are not uh, exactly. So in a great place, that's the strength.
Of the portfolio we have as a company here, so this paper and basic industries, well, 85% of the company is growing 4% and 20%. Um, our growth engines are growing double digits.
That's what at the same time. And that's where we invest. So generally, the mix of growth is going to turn positive, and that's going to help us get.
Christophe Beck: So I can't judge what's gonna happen in the outside environment, but generally I feel really good about the 20% by 20%.
Closer, uh, to the 20% quicker as well at the same time, so I can't judge what's going to happen in the outside environment. But generally, um, I feel really good, uh, about the 20% by 27.
John Roberts: Our next question comes from the line of John Roberts with Missouho Securities. Please receive your question. Thank you.
Scott Kirkland: With the balance sheet now in great shape, how would you characterize the pipeline for inorganic growth? It's been a while since the Pure Light deal. It's been a while, end of 21. We did Pure Light, we did a few smaller acquisitions in the meantime, which is the bread and butter of our M&A engine, by the way. And sometimes we have a few bigger ones. And you're right, we have great cash flow, great cash flow conversion, very low leverage ratio, and it's going to keep getting lower, obviously, as time passes by. It's putting us in a great position to invest where it makes more sense.
Our next question comes from the line of John Roberts with Mizuho Securities. Please proceed with your question.
Um, thank you. Would the balance sheet now be in great shape? How would you characterize the pipeline for inorganic growth? It's been a while since the Pure Light deal.
it's been a while, and
Positions, uh, in the meantime, which is the bread and butter of our M&A engine, uh, by the way. And sometimes we have a few, uh, bigger ones. And you're right, we have great cash flow, great cash flow conversion, um, very low uh, leverage ratio, and it's going to keep getting lower, uh, obviously. Um, time passes by. Uh,
Christophe Beck: And John, we're going to keep investing, as we've always done. It's first in dividends, it's in our business, and we have plenty of opportunities. We talked about innovation on this call, it's on our customers' technology, as well, in dispensing, in dish machines, in equipment, and so on, as we've always done. And then there is the M&A. I really like the pipeline that we have, very focused on the three areas that have been a priority for me. Water, and especially on the high-tech side, data centers, and microelectronics, so PAPs, in other words, in life science and in digital technology.
Christophe Beck: So, I really like the pipeline we have, the capabilities we have at the same time, but we will always remain disciplined, as well, in terms of how we deploy our capital. So, if we find the right thing, and as mentioned, there are a lot of right, good things out there for us, we will move, and we'll let you know, obviously, and as a lot of priority will always be buybacks, as we've done. for the past few years, and as we're doing, as well in 25. So I don't think we could be in a better position right now.
We have, uh, at the same time, but we will always remain disciplined, um, as well in terms of how we deploy our capital. So if we find the right things, and as mentioned, there are a lot of good things.
Uh, out there for us. We will move and we'll let you know, obviously. And, um, as a lot of priority will always be buybacks, as we've done in the past few years and as we do in, uh, as well in.
Scott Kirkland: So we have a great machine generating a lot of cash, a fortress balance sheet, great opportunities in front of us and priorities that haven't changed for a very long time.
2025 at the same time, so I don't think we could be in a better position right now. We have a great machine generating a lot of cash, a fortress balance sheet, great opportunities in front of us, and priorities that I haven't changed forever.
Jeffrey Zekauskas: The next question comes from the line of Jeff Zekauskas with J.P. Morgan. Thanks very much. in the water business. The organic change was 2%. And I think your water business grew, maybe volumes grew one, please correct me if I'm wrong. on your overall price. for the company was, you know, 2%, but it seems that it was lower in water.
The next question comes from the line of Jeffster Caucus with JP Morgan. Please go ahead with your question.
Uh, thanks very much.
Um, in the Water Business.
The organic change was.
2% and that I think your water business crew may be volumes crew 1. Please correct me if I'm wrong.
Christophe Beck: So is the challenge for the second half to get better pricing in the water division, and do you need it in paper and in heavy industry where you're contracting a little bit? Is that the challenge for the second? in person. No, I don't think so. Our world of business has always been pretty strong at driving value price backed by total value delivered. They've invented, actually, that concept a long time ago. So they know how to do it. They've been good at delivering it. At the same time, we make absolutely sure that we get the value price when we truly get as well.
And, um, your overall price for the company was, you know, 2%, but it seems that it was lower in water.
So, it is the challenge for the second half.
To get better pricing in the Water Division, do you need it in paper? And in heavy industry, where you're contracting a little bit, is that the challenge for the second half in pricing?
No. Um, I don't think so. Um, our world of business has always been pretty strong.
A driving value price backed by total value delivered. Uh, they've invented, uh, actually that concept, uh, a long time ago.
Christophe Beck: So the TVD, the cost savings with in our customer operations. So we know this closing by segment, as you know, so price and volume, but you're more right than not. So with your assumption on water, which makes me feel good, actually, and as mentioned before, so water, organic growth, eggs, paper, and basic industries, well, would be four. So it's a very good story. As Scott mentioned, as well, and the operating income would be in the mid-teens as well at the same time. So a really good story.
So they know how to do it. They've been good at. Delivering it at the same time, we make absolutely sure that we get the value price when we truly get as well. So the TVD the cost savings within, uh, our customer operation. So we we know this closing by segment as you know, the price and volume, um, but you're more right than not. Um, so with a, your assumption on, on water, which makes me feel good, uh, actually, and as mentioned before, um, so water, uh, organic growth.
Christophe Beck: So for me, Jeff, it's really about focusing on what grows best in water. It's global high tech, data centers, Especially so, microelectronics, these two growing collectively, so 30%, very good. The rest of the business is growing nicely. And we have those two businesses that are not growing, paper and basic industries. But I think that that's going to change at some point. Basic industries is, as you maybe or maybe don't know, it's our steel business, it's our power business, and it's our chemical. are in there. Well, those ones with what's happening around us with the whole trade negotiations, I think, ultimately, are going to turn better as well over time.
Paper and basic industries, well, would be 4. Uh, so it's a very good story. Um, Scott mentioned as well that the operating incomes would be up in the meetings at the same time. So, uh, a really good story.
For me, uh, Jeff, it's really sort of focusing on what grows best. Um, in water, it's global hijack data centers, and especially so, uh, microelectronics. These two are growing collectively at 30%, uh, very good. The rest of the business is growing nicely. Um, and we have those two businesses that are not growing, uh, paper and basic industries, but I think that that's going to change, um, at some point. Basic industries, uh, is, as you maybe or maybe don't know, um, it's our steel business.
Uh, in our power business and in our chemicals business.
Christophe Beck: And the paper business is very much related. So those are the five consumer goods growth as companies grow out there, the FMCG of that world. So those ones are going to be okay. It's never going to be a great growth, but it's going to be okay as well. So if I put it all together, 85% is going really well in that water business, 15% a little bit more challenged. Margins are really good in the businesses that are growing fast, and our growth businesses keep accelerating, especially in the high tech sector. So generally water will be Thank you.
Uh are in there. Well those ones with what's happening around us um with the whole uh trade negotiations. I think ultimately are going to turn better uh as well all the time and the paper business is very much related to to consumer goods growth. Um, as companies are uh, grow out there of the the
CG, um, of that world. So those ones are going to be okay; it's never going to be a great cross, but it's going to be okay as well. So if I put it all together, 85% is going really well in that water business; 15% is a little bit more challenged. Margins are really good in the businesses that are growing for us, and our growth businesses keep accelerating, especially in the high-tech sector. So generally, water will be in good shape.
Andy Wittmann: The next question is in the line of Andy Wittmann with Baird. Please proceed with your question. Great. Good afternoon, and thank you for taking my question. I guess I wanted to ask about free cash flow and just try to understand a little bit more about what's happening here. As I look at it on a year-over-year basis and normalize it for days, like the inventory up to the smidge, receivables are up more than a smidge, and payable days are actually extended as well. Yet year-over-year, the cash flow is down, and year-to-date, you're about 65 percent of your adjusted net income.
Thank you. The next question is from the line of Andy Whitman. Please receive your questions.
Scott Kirkland: I know you always target 95 percent, and so obviously the second half is going to have to ramp if this year is going to be a 95 percent year.
Down. And year to date, you're about 65% of your adjusted net income. I know you always target 95%.
Scott Kirkland: So I guess, Scott, maybe the question is, do you still expect it to be a 95 percent year? And maybe what happened in the first half, or did anything happen that's unusual in the first half that we should know about that maybe has you at or slightly below plan for the year? And we have this really strong comp to last year. It was just due to the timing of cash payments. And then that 90 percent, as I said, we expect to deliver for the full year. It's driven by the strong earnings growth. But as you might also recall, I talked about CapEx will be a little bit higher this year, around 7 percent, which is why it's at 90, not maybe closer to 95 percent, but feels very good about the free cash flow trajectory.
Um, and so obviously the second half is going to have to ramp if if if this year is going to be a 95% year. So I guess Scott. Maybe the question is, do you still expect it to be 95% year and um, maybe what happened in the first half? Or do you see did anything happen? That's unusual in the first half that we should know about that. Maybe has you at or slightly below plan for the year. Okay. Thank you. And go ahead more of an expert than Andy on cash flow. The high level answers on the year. I expected the free cash flow conversion to be right around 90% which is our historical Trend. If you think about cash flow for the year, what you might not recall in q1, is that we had an unfavorable year-over-year comparison. If you look at, Q2 the free cash flows were actually up 17% year-over-year driven by the great earnings growth but in the year to date or and then the year to date um down because of that q1. And we had this really strong comp to last year and it was just due to the timing of cash payments. Um and then that 90% as I said we expect uh to deliver for the full year, it's driven by
Scott Kirkland: But because of the Q1, the year-to-date number looks a little bit different.
The strong attorney growth. But as you might also recall, I talked about capex will be a little bit higher this year around 7%, which is why it's at 90%, not maybe closer to 95%. But I feel very good about the free cash flow trajectory. Um, but because of Q1, the year-to-date number looks a little bit funky.
Matthew Dillow: Our next question is from the line of Matthew Dillow with Bank of America. Let's see if he has a question. Yeah, thank you. Good afternoon. Margins in life science were pretty strong on the quarter. Can we just dive into that a little bit? And maybe what's driving the expected quarter over quarter drop back towards the mid teens from from the nearly 20% on the quarter itself? It's two things, actually, Matt. When you think about life science, the margin growth in Q2 was especially driven because pharma, biopharma, had great growth and had the highest margins as well at the same time.
Our next question is in line with Matthew from Bank of America.
To see a few questions.
Yeah, thank you. Good afternoon. Um,
Margins and life sciences were pretty strong this quarter.
Can we just dive into that a little bit and maybe what's driving the expected quarter over quarter? Drop, back towards the mid teens, um, from from the nearly 20% on the quarter itself.
Christophe Beck: So the mix of margins was highly positive in the second quarter. So very good story, Matt, to that great outcome, as well at the same time. Interestingly enough, in that business, it's a little bit depending on the deliveries as well that you can have. The price per pound is absolutely huge in that business. So depending on the exact timing of deliveries, it might be on one quarter or the other one, which is totally fine. There's no cyclicality in that business. Year over year, it's pretty steady. But quarter by quarter, you might have some timing differences related to deliveries.
Christophe Beck: But what's most important is that, as I've shared many times, we keep investing in that business. We are the small, agile of the three players in that industry on the planet and want to remain so. So we keep investing in that business. So you get mid-teens type of reported ROI margin. The true underlying are closer to the mid-20s out there.
It's 2 things. Um, actually, Matt, uh, when you think about, um, life science are the margin growth, um, in um, in Q2 with a specialty driven because farmer bio farmer, um, had great growth, uh, and it has the highest margins as well at the same time. So the mix of margins was highly positive, uh, in the second quarter. Um, so very good story in Internet. Um, do that, uh, great help as well at the same time, interestingly enough in that business. Um, it's a little bit depending on the daily basis, uh, as well as the T can have, uh, you know, that, uh, price per pound of these absolutely huge, uh, in that business. So, depending on the exact timing of the deliveries, it might be on 1 quarter or the other 1, which is totally fine. Uh, there's no cyclicality, uh, in that business, uh, year-over-year. It's pretty steady but quarter by quarter. So you, you might have some timing differences, uh, related to, um, to deliveries. But what's most important is that
Christophe Beck: So it's kind of investing the difference in capabilities, means innovation, people, R&D in the world and capacity in plants as well at the same time, in order to really fuel that business and get to that leadership position that we're looking for as a business here. So it won't be a straight line to heaven, but a very strong performance. I've always been bullish about that business. Well, the results so far this year are very strong, and they're going to keep getting stronger. So it's a really good story that keeps getting stronger. But I want to make sure I keep investing as well at the same time.
As I've shared so many times, we we keep investing, um, in that business. Um we are the small agile um, of the, the 3 players um, in that industry. So on on the planet and 1 are remain. So so we keep investing um, in that business. So you get MC Gene type of reported, um oi margin the true underlying closer to the mid 20s, um, out there so it kind of investing the difference in capabilities, means Innovation, people R&D, um, in the world and capacity in Plants as well at the same time in order to release use that business and, and get to that leadership position that we're looking for, um, as a business here. So it won't be a straight line to Heaven. Um, but a very strong performance, uh, I've always been bullish about that business. Uh,
Christophe Beck: That will have an impact on our ROI margin.
All the results so far this year are very strong, and they're going to keep getting stronger. So, it's a really good story that keeps getting stronger. But I want to make sure I keep investing as well, at the same time that will have an impact on our.
Hawaii margin for a while.
Mike Harrison: Our next question is from the line of Mike Harrison with Seaport Research Partners. Hi, good afternoon. I'm just looking at the balance sheet and the $1.9 billion in cash on the balance sheet is kind of an elevated number. I know that you have about $600 million worth of notes that are coming due, but any other explanation of why that cash balance is getting so high? And kind of should we expect that to remain high, you know, adjusted for that $600 million of notes payable?
Our next question is on the line of Mike Harrison with Seaport Research Partners. Please proceed with your questions.
Scott Kirkland: Good to hear you, Mike. I'll pass it to Scott, obviously. Yeah. Hey, Mike. First, I'll just start by saying our priorities around capital allocation have not changed. As Christophe said before, it's dividends, investing in the business, and what's left over, we think about buybacks. As you said, balance sheet's in a great position. That leverage is down to $1.7, and just for reference, our long-term target is around two times.
Hi, good afternoon. Um, uh, just looking at the balance sheet and the the the 1.9 billion in cash on the balance sheet is, is kind of an elevated. Uh, number, I know that you have about 600 million dollars worth of notes that are coming due. But any other explanation of why that cash balance is getting so high and, and kind of should we expect that to remain high, you know, adjusted for that, 600 million of notes payable
Hey, good to hear from you, man. How about you say?
Yeah. Hey, Mike. First, I just start by saying that
our, our
Scott Kirkland: As Christophe said, we get to invest in the business, capabilities, capacity, firepower, innovation, but at the same time, we have a very good M&A pipeline that we'll be opportunistic about, but also very disciplined and in a great position to enhance value by investing in those growth engines that he talked about, water, GHG, life sciences, digital, but be disciplined about it to make sure we drive great returns. So, we like the position we're in.
Averages down to 1.7, and just for reference, our long-term target is around 2 times. So we are in a very good position; as you said, about $1.9 billion at the end of Q2. That included millions of dollars from a bond offering we did in June, and that was in advance of a gyro maturity of about $525 million that we paid down in July. So there was a little bit of timing from the bond offering on the maturity here, but still, even after that, cash remains high. But it's really the fact that we have a strong balance sheet, and we like the optionality it gives us to create value, particularly in this environment. Right? As Christophe said, we get to invest in the business capabilities, capacity, firepower, and innovation. But at the same time, we have a very good M&A pipeline that we will be opportunistic about, but also very disciplined, and we are in a great position to enhance value by investing in those growth engines that he talked about: water, health, life science, and digital. But we need to be disciplined about it and make sure we drive great returns. So we like the position we're in.
Lawrence Alexander: The next question is from the line of Lawrence Alexander with Jeffrey Zekauskas. Hello, so one question about the gross investments that you're doing on the in the three gross areas or the three priority areas. How do the IRRs and cash paybacks or payback periods compare with the more traditional investments that Ecolab would do in the institutional and in the now co-business in the 90s, 2000, 2010? Can you give a sense if there's any material difference in the economics that you're seeing?
Next question, from the line of Lawrence Alexander with Jeffrey's. Please receive your questions.
Hello. So, one question about the gross investments that you're making in the three growth areas where the three priority areas.
How do the IRS and cash paybacks?
Um, are payback periods compared with the more traditional investments that Ecolab would do in the institutional and in the now co-business in the 90s, 2020? Can you see the sense for if there's any material difference in the economics that you're seeing?
Christophe Beck: So I don't have an exact answer to that. I don't think that Scott has one either, but it's four businesses first, and depending on how you count, it can be even five, because it's life science, it's GHT, so global high tech, which supports data centers and microelectronics, it's pest intelligence, and it's Ecolab Digital. All four or five are growing very fast, so close to 3 billion, growing double digit, which margins that are closer to a 30 than a 20. That's a very good story. So if margins are over average, and you know, we invest as we go as a business, as a business model principle, basically, well, we should have a return that's higher than the average.
So I don't have an exact answer to that. I don't think that Scott has one either, but, um, before business, first, and depending on how your account can be even five, because it's a life science, it's GHT, um, so Global High Tech.
Wants data.
Christophe Beck: That's my rocket scientist math.
Christophe Beck: I'm not the science guy. But that's the way I would look at it. And that's why I keep investing in those businesses where I know they will be booming. When we think about biopharma, well, this is the future of pharma. When I think about data centers, while we're growing 30%, we have technology that no one else has, in order to really help data centers shift the power that's being used for cooling, which is 40% of the power, by the way, towards compute. When we think about microelectronics, think about one of the big microelectronics manufacturers in Asia, in the world, today uses as much water as one of the largest food company in the world in one year.
Uh, microelectronics, its best intelligence, any collab digital, um, all 4 or 5, uh, are growing very fast. So, close to $3 billion, growing double digits, um, with margins that are closer to 30%. As you know, we invest as we go as a business. Um, as a business model principle, basically, we should have a return that's higher than the average. Um, that's my rocket scientist math.
Christophe Beck: So you put those two numbers together and say, well, water solutions will be game changing for that industry.
Christophe Beck: Past intelligence, we talked about it. And Ecolab Digital, that's doing unbelievable work under David Bingenheimer's leadership. It's been a year, 380 million annualized business, growing 30%, a very high margin. Those are all businesses that are going to be great down the road.
I'm not the kind of guy but that's the way I would look at it and that's why I keep investing in those businesses where I know they will be booming when we think about bio for. Well, this is the future of farmer. When I think about data centers, where we're growing 30%, we have technology that no 1 else has in order to really help data, center shift, the power that's being used for cooling, which is 40% of the power, by the way, towards compute, when we think about, uh, micro Electronics, think about, uh, 1 of the big micro Electronics. Um, manufacturers, uh, in Asia in the world today uses as much water as 1 of the largest food company in the world, in 1 year. So, you put those 2 numbers together and say, well, uh, water solutions will be game-changing for that industry past intelligence. We talked about it and, um, Ecolab digital, that's doing. Unbelievable work, um, under David Bing and heimer's, uh, leadership, um, material.
It's been a year; $380 million annualized business growing 30% at very high margins. Those are all businesses that are going to be great down the road for me. I know it's higher than average in terms of return and it's definitely the right thing to do.
Joshua Spector: Our next question is from the line of Josh Spector with UBS. Please receive their question. Yeah, good morning.
Our next question is from the line of Josh Spectre with UBS. Please proceed with your question.
Christophe Beck: I was wondering if you could size how much you think you're reinvesting in the business today, versus what you thought you would do in 2025, six months ago. And if you could just help us understand kind of where that is going, I guess, in the context that your SG&A is actually down year over year, where is that going? And kind of how do you think about the timeline of that payback? Somewhat similar to Lawrence's question. Thanks. You know, it's a difficult question to answer here, but you've heard from Scott in terms of GAPEX. So it's been one percentage point plus that we've invested this year, and since it's working quite well, it's maybe something we might be continuing to do as well.
Yeah, hi, good morning. Um, I was wondering if you could size how much you think you're reinvesting in the business today versus what you thought you would do in 2025 six months ago. And if you could just help us understand kind of where that is going, I guess in the context that your SG&A is actually down year-over-year.
And kind of how do you think about the timeline of that? Payback, somewhat similar, to Lawrence's question. Thanks.
Christophe Beck: In SG&A, it might be half a point. It depends how you define that very clearly, but we want to make sure that it's focused on three things. The first one is safe firepower, which means serving customers. Second is digital technologies. And third is One Ecolab. This is where we invest, how we invest, and really making sure that we build those businesses as strong as we can. So I hope it's giving you some perspective on how we're thinking about it.
You know, it's a difficult question to answer here, but, uh, you've heard so from, uh, Scott in terms of GAPPX. Uh, so it's been 1% each point plus, um, that we've invested, uh, this year. And since it's working quite well, it's maybe something, uh, we might be continuing to do, um, as well in SG&A. It might be half a point.
Christophe Beck: But at the same time, like the life science example before, I want to know, what's the margin pre-investment and post-investment? So that we know what's the long-term run rate. And life science, that's mid-teens reported, mid-20s kind of lying. And, well, as the business grows, that's going to go up as well at the same time. So very focused, very controlled, and we know where we're going.
Power, um, which means serving customers second, is digits of Technologies. Um, and so it is 1E, uh, this is where we invest, how we invest, and really making sure that we build those businesses as strong as we can. So I hope it's giving you, uh, some perspective on how we're thinking about it, but at the same time, like the life science example before, I want to know what's the margin pre-investment and.
Host investment. So that we know what's the long term run rate and life science that are meetings. Uh, reported mid 20s, uh uh underlying and well as the business grows, uh, that's going to go up as well at the same time. So, very focused, very controlled. And we know where we going.
Jason Haas: Our next question is from the line of Jason Haas with Wells Fargo. Hey, good afternoon. Thanks for taking my question.
Next question.
In the line of Jason Hos with Wells Fargo.
Use your question.
Christophe Beck: This one may piggyback off the last question, but I'm curious if you could maybe give some examples of the cost savings and efficiencies that you've been able to find as you've implemented One Ecolab and some of your other initiatives. Thank you.
Scott Kirkland: Hey, that's a great question. So for Scott, who has done an amazing work in One Ecolab, especially the one company part, which is really aligning the whole company behind our customers by leveraging technology, Gen AI in dramatic ways, probably one of the company's most advanced in that work.
Hey, good afternoon and thanks for taking my question. This 1 May piggy back off the last last question. Um but I'm curious if you could maybe give some examples of the the cost savings and efficiencies that you've been able to to find as you've implemented uh 1 Eco lab and some of your other initiatives. Thank you.
Scott Kirkland: you're out there so Scott why don't you share a little bit Yeah, absolutely. Jason, as you said, F&A leverage is very good. We drove 50 basis points in Q2. Expect to drive the 20 basis points we talked about earlier in the year as we continue to invest in the business. The one thing I do want to note, I would take the opportunity, not every quarter will be created equal. We expect Q3 F&A to be up a couple of points sequentially, Q2 to Q3, in part due to FX. As you look at FX last year with a favorable item in Q3, it will be unfavorable this year.
Scott Kirkland: But to get to the core of your question on the savings, what's driving that leverage is one, Ecolab, which is allowing us to reinvest in the business. As we've talked about, Ecolab is a growth program, but at the same time, there's productivity that we're getting out of it, that we're focused on driving this growth with our cross-sell opportunity, which is $55 billion. But at the same time, we're driving great efficiencies as we do that. We're ahead of schedule on $140 million of savings. I would say we'll be a little bit north of 50% of that realized in 2025.
Hey, that's a great question. So with Scott who has done an amazing work, um, in wanik, especially the, the 1 company part, um, which is really aligning the whole company behind. Um, our customers, uh, by leveraging technology Genai in dramatic ways, probably 1 of the companies most advanced uh, in that work. At least that's what we hear out there. Uh, so Scott, why, why don't you share a little bit? Uh, what you see and what you're doing? Yeah, absolutely. Jason. You said, um, yesterday leverages very good. We drove 50 basis points in Q2, um, expected drive that, that 20 basis points. We talked about earlier, in the year as we continue to invest in the business. The 1 thing I do want to know and I'm going to take the opportunity. Um not every quarter will be uh created equal. Um, we expect Q3 sgna to be up a couple points, sequentially Q2 to Q3 um in part due to the FX. As you look at FX last year was a favor favorable item in Q3. It will be unfavorable this year but to get to the core of your question on on the savings. What's driving that Leverage?
Scott Kirkland: Of course, the costs come a little bit ahead. And driving those savings is how we use our five global centers of excellence and create some scalable processes in leveraging thatogenic AI that Christophe talked about, automating and augmenting people work, which improved the experience of both our customers as well as our associates. So I expect, as I said, the SG&A leverage to be about 20 to 30 basis points in 2025 as we continue to then reinvest in the business. But beyond 2025, that platform from OneEcolab and the digital platform that we're building there is going to help us generate leverage above our historical average, which has been about 20 to 30 basis points.
Its 1 equal app, which is allowing us to reinvest in the business. Um, as we've talked about Ecolab is a growth program. Um, but at the same time, there's productivity that we're getting out of it that we're focused on driving this growth with our uh, cross sell opportunity, which is 55 billion dollars. Um, but at the same time we're driving um great efficiencies as we do that we're ahead of schedule on 140 million of savings. I would say it will be a little bit north of 50% of that realized in 2025, of course.
Costs come a little bit ahead and driving. Those savings is how we use our our 5, Global centers of excellence, right? And create some scalable processes and leveraging that hygienic AI. That Kristoff talked about automating and augmenting people work. Right? Which includes which improves the experience of both our customers, as well as our Associates. So I expect, as I said, the FNA leveraged to be about 20 to 30 basis points in 2025, as we continue to, then, to reinvest in the business. But beyond 25, that platform from 1 equal lab, and the digital, um, platform that we're building. There is going to help us generate leverage above our historical average, which has been about 20 to 30 basis points.
Kevin Mccarthy: Next question is from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question. Yes, thank you. And good afternoon. Christophe, I appreciate your your bifurcation into the 85% is doing well in the 15% where basic industries are more challenging. I'm curious as to whether the relative weakness in those basic industry markets may necessitate any new or incremental actions by Ecolab. I'm thinking about portfolio composition, resource allocation, productivity initiatives and the like. Or is it the case that, you know, hey, these are really just cyclical end markets and they'll come back before too long and it would be a mistake to go down those paths?
Next question, it's in the line of Kevin McCarthy with Vertical Research Partners.
To see if your questions.
Yes, thank you, and good afternoon, uh, Kristoff. I appreciate your, uh, your bifurcation into the 85% that's doing well and the 15%.
Christophe Beck: Maybe a different way to ask the question is, is it purely cyclical or do you see any structural elements that may argue for pulling some levers? No, I don't see any structural issue. And if there were, I mean, we've demonstrated that in the past, that we have no problem of addressing those issues, either ourselves or in better hands, as we did with our surgical business, you know, in 2024. This is not the case in those those two businesses. And if I step back just for a second, one of the big strengths of our company, of Ecolab, is the number of end markets that we're serving, the number of geographies that we're serving as well at the same time, which means that when some are struggling a little bit, well, the vast majority is doing well for some very well, like our growth engines, as mentioned before.
Where basic Industries are more challenging. Uh, I'm curious as to whether the relative weakness in those basic industry. Markets, May necessitate any new or or incremental actions by equal lab. I'm thinking about portfolio composition resource allocation productivity initiatives and the like or or is it the case that you know, hey these are really just cyclical land markets and uh they'll come back uh before too long and it would be a mistake to uh,
Go down those paths. Maybe a different way to ask the question is: is it purely cyclical, or do you see any structural elements that may argue for pulling some levers?
I don't see any structure issue. And if there were, um,
Christophe Beck: So there will not be all our businesses, all our geographies, being in the green all at the same time. That would be an ideal world. So I see that as a strength of the company. And when I think about those two businesses, especially in basic industries, when I think about power, it's been a sleepy business forever. And we have very good shares, we serve most of the nuclear plants, if not all of them out there, but it's not been growing for a very long time. Well, this is changing dramatically now, because of all the developments in AI infrastructure, data centers, microelectronics, and so on there, that requires so much more power.
I think the number of geographies that be serving as well at the same time, which means that, uh, when some are struggling a little bit. Well, the vast majority is doing well for some very well, like our growth engines, uh, as mentioned before. So they will not be all our businesses, all our geographies, uh, being in the green, all at the same time, um, that would be obviously an Ideal World. So I see that as a strength um, of the company. And and when I think about those 2 businesses,
Especially in basic industries, when I think about power, um, it's been a sleepy business forever. Um, we have.
Very good shares. We serve most of the nuclear plants, if not all of them, um, out there but it's not been growing for a very long time. Well, this is changing dramatically now, um, because of all the developments in, in AI, infrastructure data, centers micro electronics and so on there, um, that requires so much more, uh, Power. This takes time, obviously, to ramp up, but a business, which I thought had limited future. I think has now a big future and we have all the capabilities and even some of the capabilities that the industry themselves do not have anymore. Um, because well, we were the ones and, uh, having it and they, uh, just reduced their capabilities, uh, and leveraged what we had, uh, in the past, especially in the nuclear industry.
Christophe Beck: Graphics paper, which We are much less used to be off our business. It's less than 20% today. And if our companies have any indication where we're trying to be a total paperless company that everything is on digital, well, the business is gonna disappear. And that's why we're shifting towards consumer products, tissues and towels and specialized packaging. I like the innovation that we're making here. We have a lot of science, a lot of R&D in that field. So we will get to the right place.
Well, I think that that's going to be good for us in the future. When you think about our paper business, the shift that we've made.
Topics paper. Um, which
Christophe Beck: So in short, those two businesses are not candidates for. EG options, to use the industry term out there, it's much more for us to bring them to the right place. And we know how to do that. So generally, I'm okay.
We are much less used to be off our business. It's less than 20% today. And even our companies of any indication where we're trying to be a total paperless company that everything is on digital. Well, the business is going to disappear and that's why we shifting towards, uh, consumer products, uh, tissues and towels and, uh, specialized packaging. I like the Innovation that we making here. Um, we have a lot of science, a lot of R&D, um, in that field, so we will get to the right place. So in short, those 2 businesses are not candidates, uh, for, uh,
EEG options uh, to use
The term is out there. It's much more for us to bring it to the right place, and we know how to do that. So generally,
Operator: Thank you.
Scott Schneeberger: Our final questions from the line of Scott Schneeberger with Oppenheimer. Thanks very much. I have a question for both of you.
Thank you. Our final question is from the line of Scott Schneberger. What's up, Andrew? Please just use your questions.
Scott Kirkland: Scott, first, have you had time to consider the One Big Beautiful Bill Act, the impact, most likely on free cash flow, how you're thinking about that, any comprehensive quantification? And then Christophe, a lot of discussion, particularly about some of the basic industry paper software areas that seem, you mentioned earlier, impacted by tariffs. Could you just kind of address at a high level how you're thinking about the tariffs right now, how it could affect in the back half? I know it's very uncertain. So you can't really give one scenario. But what you're thinking about what's on your mind, as far as what what what you may be experiencing in the back half for the for the broader business.
Uh thanks very much. I have a question for both of you. Um, Scott first just have you had time to consider the the 1, big beautiful, bill act uh the impact of most likely on on on free cash flow. How you're thinking about that any comprehensive quantification and then Kristoff, a lot of discussion, particularly about some of the you know,
Christophe Beck: Thanks.
Scott Kirkland: Hey, thank you, Scott. I'll pass it first to the other Scott to talk about the BBB, and then we'll cover the other question. Thanks, Scott. So, hey, net overall, it's still early days, but our expectation is the big beautiful bill is going to be a net positive for the company, as you think about it, encouraging investment in the US, which is our strongest market, market growing really well with good margins, at least to the tax side of it, a bit early to quantify any impact. But I would just tell you where I'm sitting here today.
Basic industry, paper software areas. That seem you mentioned earlier, impacted by tariffs, could you just kind of address a high level, how you're thinking about the tariffs right now how it could affect in the back half? I know it's very uncertain so you can't really give 1 scenario. But what you're thinking about what's on your mind, uh, as far as what uh what what what you may be, uh be experiencing in the back half uh for the for the broader business. Thanks.
Hey, thank you, Scott uh as I said first to uh to yeah, let's go uh, to talk about the BBB and that's covered the other question.
Christophe Beck: I don't expect it to have a material impact on our tax rate, frankly. But again, net overall expected to be overall favorable to the business on the tax side, if anything, there be be some short term cash tax timing, but not an overall effect on the rate. So for the second part of your question, Scott, so the tariffs for the second half, well, they're gonna be more impactful by design. It's just a question of time. But as mentioned before, I feel really good with our preparedness, the mechanics as well of it. I see four components of it.
Thanks, Scott. Um, so hey, net overall, uh, it's still early days, but our expectation is the big beautiful bill is going to be a net positive for the company. If you think about it, it's encouraging investment in the U.S., which is our strongest market. Growing really well with good margins, uh, at least to the tax side of it. Um, it's a bit early to quantify any impact, but I would just tell you where I'm sitting here today, I don't expect it to have a material impact on our tax rate, frankly. But again, that overall is expected to be favorable to the business on the tax side. If anything, there may be some short-term cash tax timing, but not an overall effect on the rate.
Christophe Beck: So on one hand, so you get the pure tariffs, how much you pay, so when you import, but we don't import that much, since 92% of what we sell is produced locally, which has been our model for a very long time as a company, and we're driving that up. The second are the prices going up, so for local manufacturers, because everybody's onshoring the whole idea, obviously, of the tariffs here. And then we mitigate that, so first by great supply chain work, and I'm really blessed with the team we have in supply chain, and we have the trade surcharge.
So, for the second part, um, a few questions, uh, Scott. So the carrots, uh, for the second half, well, they're going to be more impactful by design. Uh, it's just a question of time, but as mentioned before, I feel really good with um, our preparedness, the mechanics, um, as well of it. I see four components, um, of it. Uh, so on one hand, so you get um, the pure tariffs on which you pay. So when you import, but we don't import that much since 92% of what we sell is produced locally, which has been our um, model for a very long time as a company, and we're driving that up.
Christophe Beck: And if I put all that together, it's a clear net positive in practice in Q2, and when I look at the outlook for the second half of the year, I feel really good about it, and that's one of the reasons why our pricing is gonna go up. And second, as I've mentioned before, I feel really good about our delivery of our 13%, or 12 to 15 for the next few quarters, and for 2026, because, well, we're in a very fortunate place. Momentum is good, 85% of the business, so 4%, and delivering double-digit operating income, a very good place.
Christophe Beck: The macro is good for us in terms of water for AI infrastructure, sorry, I'm gonna get it right, life science for biotech, productivity and hospitality, and in-person intelligence, and ultimately, so our fundamentals are really strong as a company.
So for local manufacturers, because everybody's functioning the whole idea, obviously, you have the of the tariffs here and then we mitigate that. So, first by great supply chain work. Uh, and I'm really blessed with the team we have in uh, in supply chain and we have the, the trade S charge. And uh, if I put all that together, it's a it's a clear, net positive in practice, in Q2. Um, and when I look at the outlook for the second half of the year, uh, I feel really good about it, and that's 1 of the reasons, um, why our pricing is going to go up. Um, in second, as I've mentioned before, I feel really good about our delivery of our 13% or 12 to 15, uh, for the next few quarters and for 2026. Because well, we're in a very fortunate place. Um, momentum uh is good 85% of the business so 4% and delivering double digit. Uh, operating income, it's a very good place.
Christophe Beck: I'd like to end where I started, as well, that whole conversation, feel really good about where we're going, really good about the delivery for the next few quarters, getting to this 12 to 15, aiming at this midpoint, and anything that gets above it, because of all the good things that are happening, will be shared between investors' returns and investments in future growth, and we'll be totally transparent as we move forward on that journey, but overall, in a very good place, and I feel good with where we're going for the second half. So, thank you to all of you, and we staffed, indeed.
The macro is good for us in terms of, uh, water for AI instruct in water for AI infrastructure. Sorry, I'm going to get it right. Um, life science, uh, for biotech productivity in hospitality and in person intelligence and ultimately it's our fundamentals, um, are really strong. Uh, as a company like to end where I started um, as well. That all conversation feel really good um uh about where we going really good about the delivery.
Operator: Thank you.
Operator: That wraps up our second quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thanks for your time and participation. Hope everyone has a great rest. Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your lines.
Um, for the next uh, few quarters getting to this, uh, 12 to 15, ah, this midpoint and anything that gets above it, uh, because of all the good things that are happening. Well, we'll be shared between investors returns and Investments, um, in future growth and we'll be totally transparent, um, as we move forward, uh, on that Journey but overall in a very good place and I feel good with where we're going for the second half on 2026. So thank you to all of you and with that Indie, thank you that wraps up our second quarter conference. Call this conference call on the associated discussion, slides will be available for replay our website.
Thank you for your time and participation. Hope everyone has a great rest of the day.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your lines.