Ecolab - Q2 2023

Transcript

Operator (participant)

Greetings, welcome to the Ecolab Second Quarter 2023 Earnings Release Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Director of investor relations Andy, you may now begin.

Andy Hedberg (Director of Investor Relations)

Thank you, and hello, everyone, and welcome to Ecolab's second quarter conference call. 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/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. Factors that could cause actual results to differ are described under the Risk Factors section in our most recent Form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. With that, I'd like to turn the call over to Christophe Beck for his comments.

Christophe Beck (Chairman and CEO)

Thank you, Andy. Welcome to everyone. In Q2, our team delivered another very good quarter, building on continued strong momentum and once again, making further improvements compared to the last quarter. Strong execution, as well as easing inflationary pressure, helped us get to the upper end of our expected Q2 earnings growth range. In an environment that remains unpredictable, our shift to offense continues to gain traction, and our confidence in delivering midterm performance that's ahead of historical average trends clearly keeps getting stronger. Organic sales growth remains strong at 9%, driven by the steady recovery of Institutional & Specialty with 13% organic growth. Pest Elimination in industrial follow, delivering 11% and 9% organic growth, respectively. Despite softening global end market demand, overall volume trends remain steady.

In other good news, volume, excluding Europe, improved from flat in Q1 to 1% growth in Q2, so volume trends are improving further, too. Adjusted earnings per share grew 13%, led by strong organic operating income growth that accelerated from 19% in the first quarter to 21% in the second. Although year-on-year comparisons are getting harder, pricing remains strong at 10%, as further new pricing continued to grow. Delivered product costs were 5% higher than last year, but eased sequentially a bit more than expected, which is further good news. We kept working on strengthening our performance, including targeted actions in Institutional, Life Sciences, and Healthcare. Institutional had another remarkable quarter as it continued its very strong recovery. Focus on new business and penetration drove share gains in units served, solutions sold, and sales delivered.

Growth, value pricing, and productivity drove strong margin improvements, which we expect to continue in the second half. Additionally, innovation in labor automation positions Institutional as the ultimate leader in the market undergoing a foundational transformation, driven by evolving consumer habits and increased use of digital technology. All good news for us. Our highly attractive Life Sciences businesses was not immune to the short-term market pressure, which led to flattish sales. However, this is much better than competition, and Life Sciences growth potential remains extremely strong. Even if this short-term market transition takes a few quarters to get back to strong growth, we're staying on offense. We're taking this as an opportunity to gain share with major customers and to further invest in capacity and capabilities in Biopharma and infrastructure of water, even if it results in short-term operating income decline.

As promised, we're also continuing our rapid transformation in Healthcare. In the first quarter, we announced a restructuring program to rightsize our cost structure. This is progressing well. Over the next few months, we will also be creating two separate yet focused businesses from our North American Healthcare business, surgical and infection prevention. Surgical, which provides protective drapes for surgeons, patients, and equipment in operating rooms, will become a standalone business. Infection prevention, on the other hand, which provides environmental hygiene to reduce hospital-acquired infections, will leverage the critical mass of our North American institutional field sales and service organization to expand customer reach and significantly improve productivity. This is just a further step on our journey to transform Healthcare into a profitable business that serves hospitals exceptionally well.

While we continue to focus on margin improvements, which improved 130 basis points in Q2, we also accelerated our shift to offense. Our 1,100 corporate account managers achieved a record new business pipeline by leveraging enterprise opportunities to drive penetration and by focusing on new business prospects to expand our reach. Our more than 25,000 field sales associates sharpened their focus on exceptional service and deploying new business, which resulted in promising share gains. Our 1,200 scientists remain focused on breakthrough innovations, which enable customers to achieve better outcomes at a lower total cost through reduced use of natural resources. We're also ramping up our investments in digital technology.

With Ecolab3D, one of the largest IoT cloud in the industry, and our 1,000 digital experts, we're uniquely positioned to further empower our field and customers to deliver best-in-class performance, to unleash unique customer value, improve field productivity, and deliver an exceptional customer experience. You'll have the opportunity to experience some of this firsthand at our Investor Day in September.... In summary, we delivered the second quarter exactly the way we wanted, with strong top and bottom line momentum despite the challenging environment. Looking ahead, we anticipate delivered product costs to remain high, but to ease progressively and for global demand to soften further. Although none of this is new, the good news is that we are well positioned to win in this environment as our momentum keeps picking up.

In the second half of the year, we expect volume growth to continue improving and gross margins to expand 150-200 basis points versus last year. During the last few years, our expertise grew as we maintained our team and rolled out new innovative solutions. Our retention rates remain high as we protected customers from supply shortages. Our margins continued to recover, and our organic operating income accelerated as we drove pricing in thoughtful ways while increasing customer value. With this, we expected adjusted earnings growth in the third quarter to improve further and to reach 12%-19%, with continued strong momentum as we exit the year. Finally, we'll remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing our leverage, and returning cash to shareholders, as we've always done.

Most importantly, with the best team, science, and capabilities in the industry, we will continue to grow our share of the high-quality, $152 billion market we serve. In other words, our future has never looked brighter. I look forward to your questions.

Andy Hedberg (Director of Investor Relations)

Thanks, Christophe. That concludes our formal remarks. As a final note, before we begin Q&A, as Christophe mentioned, we'll be hosting our 2023 Investor Day at our Nalco Water headquarters in Naperville, Illinois, on Thursday, September 14th. If you're interested in attending or have any questions, please contact my office. Operator, would you please begin the question and answer period?

Operator (participant)

Thank you. We'll now be conducting a question and answer session. We ask you please limit yourself to 1 question and 1 brief follow-up per caller, so others will have a chance to participate. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 1 moment, please, while we poll for questions. Thank you. Our first question is from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Tim Mulrooney (Equity Research Analyst)

Good morning, Christophe.

Christophe Beck (Chairman and CEO)

Good morning, Tim.

Tim Mulrooney (Equity Research Analyst)

Just 1 question for me today. You touched on this a little bit in your prepared remarks on the institutional margins, but I just wanted to dig in a little bit more because I noticed, you know, that your institutional margins, they were essentially flat year-over-year in the 1st quarter. It, it jumped up significantly in the 2nd quarter, kind of showing, you know, progress to rebuilding back to those pre-pandemic margins. Can you just talk about, you know, what drove that inflection in the 2nd quarter, why it happened now, and, you know, if you think that type of expansion is sustainable in the back half of this year? Thank you.

Christophe Beck (Chairman and CEO)

Thank you, Tim. Great question, because Institutional is our largest single business, as you know, in the company, and they had a remarkable quarter in Q2, which followed a very good quarter in Q1 as well. I've been very impressed with how the team delivered once again. You mentioned it, 13% sales growth, 40% operating income growth. The team executed perfectly well. What's important is that our new model, which we announced a few years back now, with focused sales and service organizations, one really focused on driving gains and the other one servicing customers extremely well. Well, this new organization is working really, really well. That was the right move that we made a few years back. We're gaining share with new business.

This business has a new business pipeline, which has reached record highs over the past few months, and they've done an excellent job at executing this new business. Pricing has been very good as well, which has been driven by the total value delivered that they're delivering for customers that need it so more than ever. If I look at the unit share as well in the market, with the number of units that went down, we're quite stable versus 2019, which is remarkable. Penetration is up as well, with program like Ecolab Science Certified, that's driving the usage of much more solutions than in the past as well in that business.

One other point, mentioned it so many times, since 2019, the foot traffic in food service restaurants, dine-in traffic, is down a third. Our sales in that same segment in the US is up 12%, a massive share of gain that we've delivered here. We expect this momentum to continue in the quarters to come, and I even think that the OI dollars that we had in Q4 2019, well, could be pretty close, closely delivered in Q4 this year as well, which means that we would be, in dollar terms, very close to where we were in 2019, and well, it's only upside from here. Institutions did really well.

It's driven by fundamentals of new business, of pricing, of productivity, of customer service. I like a lot where we are and even more where we're going.

Tim Mulrooney (Equity Research Analyst)

Thank you.

Operator (participant)

Our next question is from the line of Ashish Sabadra with RBC Capital Markets. Please proceed with your question.

Ashish Sabadra (Managing Director and Senior Equity Analyst)

Well, thanks for taking my question. Pretty solid gross margin expansion in the quarter, and thanks for providing color on the gross margin expansion for the back half of the year as well. I was wondering if it's possible to quantify what the delivered product cost was in the quarter, and there was obviously a comment on the delivered product cost to ease. I was wondering if you could help quantify how we, how we should think about those delivered product costs in the back half. Thanks.

Christophe Beck (Chairman and CEO)

Hey, thank you, Ashish. I'll pass that question to Scott there, with CFO.

Scott Kirkland (CFO)

Yes. Hi, Ashish. Thanks for the question. Yeah, as you said, hey, gross margins improved nicely. You know, it was up modestly in Q1, 20 basis points, but really saw a great expansion year-over-year in Q2, up 130 basis points. As Christophe said, continued to drive new pricing, as well as maintaining the pricing that we'd already achieved and had hit that peak in pricing in Q1, but continued to drive new pricing and then seeing that DPC inflation easing a bit. You know, as you said with that, is that easing inflation on DPC as well as the new pricing, is what is gonna help drive continued margin expansions in that 150 to 200 basis points year-over-year.

We expect, you know, DPC to continue to be up year-on-year, just at a smaller rate as we see in the second half of the year. As we said, up 9% in Q1, 5% in Q2, and probably low single digits in the second half.

Ashish Sabadra (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

The next question is from the line of Seth Weber with Wells Fargo. Please proceed with your question.

Seth Weber (Equity Research Analyst)

Hi, good morning. I wanted to go back to the strength in the institutional margin for a minute. Just have you, can you provide us kind of where you're at on the cost-saving program? Just trying to gauge, you know, how much of the how much of the margin expansion is, is a function of price versus volume versus the, the actual, the cost initiatives that you guys have kind of started to talk to, but not clear where you're at in that process. Thanks.

Christophe Beck (Chairman and CEO)

Hey, thank you, Seth. I'll pass that question as well to Scott. Before I do so, the two main drivers, Institutional are volume/new business and the pricing that they've done really well, also fed by new business. The restructuring that we announced as well earlier, is going quite well, but I'd like to have Scott to provide some more details on that.

Scott Kirkland (CFO)

Yeah, happy to do that. Yeah, as Christophe said, institutional margins are doing very well. It's really a combination of everything. As we talked about earlier this year, as part of the expanded program, that expanded program had a, a total run rate savings of about $195 million. The, and we expect to realize the vast majority of that, let's call it 80%+ of it, by the end of this year. We're progressing on, on, on track for that, about that pace, through the end of Q2, and that represents for the full program as well as the institutional and the INS business.

Operator (participant)

Thank you. As a reminder, we ask you to please limit yourself to one question. If you have any additional questions, you may reenter the queue at that time. The next question comes from the line of John Roberts with Credit Suisse. Please proceed with your question.

John Roberts (Managing Director)

Thank you, and nice quarter. Can you give us a rough split of the Healthcare business between surgical and infection in North America? Why is surgical so much smaller in Europe?

Christophe Beck (Chairman and CEO)

Yeah, John, hi. In North America, it's roughly 50/50. In Europe, it's mostly infection prevention, which is the reason why the bifurcation that I've talked about is happening in North America, because in Europe, it's a different business, almost focused on infection prevention today already.

Operator (participant)

Our next question comes from the line of Josh Spector with UBS. Please proceed with your question.

Josh Spector (Director of Equity Research)

Yeah, hi. Thanks for taking my question. Just, Christophe, I'm intrigued by your comments around volume, about them continuing to improve. I think, you know, a lot of companies have been a little bit cautious about some of the trends in Europe, I mean, that's still a relatively sizable market for you. You know, what are the drivers that you see that give you that confidence about margin or volumes improving? When you talk about that, is that up year-over-year, or is that sequential? Thanks.

Christophe Beck (Chairman and CEO)

Yes, Josh. It's year-on-year. The improvement that we will see in Q3 and in Q4. In Q2, I was pleased to see that, excluding Europe, our volumes went from flat to +1 year-on-year once again. It's all driven by the way we are driving the business, because the end markets, honestly, everywhere around the world, have a tendency to soften. It's not true everywhere, but for the most part, they're softening quarter-after-quarter. Hopefully, that's going to change as well over time. We're not counting on that, just to be clear. Our assumption is really that the end market trends will continue to soften in the next few quarters.

How we're driving growth, it's the old-fashioned way, by driving fundamentals. It starts with new business. This is a practice that we have perfected, so over years/decades. Our, as we call it, a Grow to Win pipeline, which is our new business pipeline, is at an all-time high right now, and we need to deliver it obviously by executing it. Customer by customer. In some businesses, it's quicker, like in institutional, or it takes a bit more time in industrial, since it's heavy equipment that we need to install. New business is really good. Penetration as well of new solutions within existing customers is a priority so for us, because it's the lower cost to execute, because we go to those customers anyway. This is improving as well.

Innovation is also in a very good place. Our innovation pipeline is also at an all-time high, it's an execution question as well. To get that done, especially in what we call the mega markets in North America, Western Europe, and in China, while we follow closely after in the other markets around the world. Those are the big reasons, and it's also driven by our new growth businesses, like data centers, growing over 20%. Microelectronics close to that as well, and our water business that's doing really well at the same time. It's really focusing on the fundamentals, what we can control, because we can't control what's happening on the market.

Operator (participant)

Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

David Begleiter (Managing Director)

Thank you. Christophe, you are investing in the business. Any way to quantify how much more you're investing this year than last year on either an absolute or relative basis? Thank you.

Christophe Beck (Chairman and CEO)

Good question. I think that's for our CFO as well, so he's looking forward to more questions. Last time he had half a question, so I'm glad that we can do it in tandem today. Scott?

Scott Kirkland (CFO)

Yeah, David, what I'd say is, I wouldn't give you a specific number here. I would say we've continued to invest in the business, not significantly different than we have in the past. As, as we've said through the last few years, we've continued to invest in the business, adding capacity, maintaining the team, investing in the team. Proportionally, it's not the, the big driver of what you're seeing from the OI margin expansion, any change in that investment.

Christophe Beck (Chairman and CEO)

Maybe one comment I'd like to add as well, so to that, David, is that we differentiate how we invest behind our businesses. Just to share a little bit how we're thinking about that as well, we call our growth engines for more investments, because they grow faster, they have a higher margin as well. We have another category, which is more transforming businesses that could get better as well. They get a bit less, but they're very focused in how we can drive our better margins. You have kind of the third category, so the ones that need to become more profitable. They get less investments until they get to the right profitability margin.

We really do that in a thoughtful manner, by business, by market, making sure we invest, the best way we can.

Operator (participant)

Our next question is from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

Jeff Zekauskas (Managing Director and Senior Equity Research Analyst)

Thanks very much. Your SG&A costs are up 7.5%, which is about your rate of sales growth. What is an SG&A going up at a lower rate? By contrast, your cost of goods sold sequentially is up 6%, your revenues are up 8%. It looks like your raw materials are falling, and I take it that that's giving you some benefit. Is that correct? Lastly, it's been a hot summer. Should that give you above average or better water treatment chemical demand in the third quarter?

Christophe Beck (Chairman and CEO)

Hey, great question. Thank you, Jeff. Three questions here for Scott, I guess.

Scott Kirkland (CFO)

Hey, Jeff. Yeah, I'll, I'll touch on the SG&A. Good question. The SG&A was up a little over sev-7.5% year-over-year in the second quarter. What I'd tell you is the underlying productivity remains really strong. We've con-- head count has come down actually modestly over the last year, while sales has increased. Our SG&A ratio h- was flat in Q2, but just as a reminder, we're down about 300 basis points over the last 3 years. The Q2 SG&A increased, more than half of that was really driven by what we call the higher incentive compensation, and really is driven by our, our strong performance.

What I would say around that as well is that on, on the SG&A, I would expect in the second half, the SG&A dollars to be pretty stable from what you saw in Q2. Which would mean it's sort of the, the mid to high single digits for the year. Certainly in, in Q3, as you might recall, we're going up a tougher comp in Q3 last year. We also expect longer term to continue to drive productivities as we're leveraging the digital investments that we've made over time.

Christophe Beck (Chairman and CEO)

That's on SG&A. Maybe an additional comment here. We've had that question so many times, Jeff, on, have you reached the bottom in terms of SG&A ratio? The short answer is, is no, because of what Scott just said. All the digital technology that we've been implementing, plus all what's to come, will improve the performance of our organization. For this year, expect our SG&A dollars are to remain kind of stable, quarter after quarter, keeping in mind that our head count at the same time, is, is slightly down as well, which is driving that productivity, not because we spend less time with customers. We spend more time, we automate most of the transactional work, if I may say.

Your second question was on delivered product cost. It is easing a bit faster than we had expected, but it's important to keep in mind it's still 40% up versus two years ago. pre-inflation, obviously that trend is a positive trend for us, and I'll take that obviously, to improve margins as well. Most of the work is on pricing and new pricing, which is going really well. Your last question on the summer, we are in 172 countries. It's not impacting in material ways the business the way we look at it. No influence of that, at least no significant one.

Operator (participant)

Our next question is from the line of Christopher Parkinson with Mizuho. Please proceed with your question.

Christopher Parkinson (Managing Director)

Great. Thank you so much. Just on the Institutional side, you, you have some very helpful commentary by region. I was just hoping to dive down a little bit more on the volume trends in the various geographies, obviously, specifically North America, and just what ultimately is underscoring the confidence and kind of, you know, market share gains, just given all of the volume volatility, you know, in the post-COVID era. Just any color on that and just trying to extrapolate, you know, where the real opportunity is, you know, heading into 2024 and 2025. Thank you so much.

Christophe Beck (Chairman and CEO)

Hey, thank you, Chris. On institutionally, it's been pretty broad-based. The improvements, that's been true, in the three mega markets, again, as we call them, in North America, in Western Europe, and in Greater China. Good progress on all three fronts here, which is our main focus. Then we have all the other markets, which are doing very well, as well. At the same time, even though they're secondary in terms of investments and in terms of our priorities, for us. The, the way we grow, volume is really so in institutional to get even better at uncertain, circle the customer, circle the globe, or in more modern way to describe it, with enterprise sale. To have an exclusive or as close to exclusive, partnerships, with our global customers.

A program like Ecolab Science Certified, which is mostly focused on North America today, well, helps the customer secure their guests, improve their performance, and improve as well, guest satisfaction at the same time when they use all our products as well at the same time. Many of our customers are franchised organizations, which means leveraging what we do is helping deliver the quality standards that they want, that they define at the central level, anywhere around the world. It's only us who ultimately can deliver that as well. Last but not least, it's a solution to, to improve labor automation.

Institutional customers, have had, very good years in terms of margins the last two years, because they've managed to have higher prices and lower costs, initially because, of the labor shortage, and ultimately have noticed that it was a good way to improve their margins. Our innovation is focused on helping them keep those better margins by automating, the work that used to be done, by what I would call cheap labor. Those are the main drivers, so for the, for the growth in institutional.

Operator (participant)

Next question comes in the line of Manav Patnaik with Barclays. Please proceed with your question.

Manav Patnaik (Managing Director and Senior Equity Analyst)

Yeah, hi, thank you. Christoph, I guess, you know, in Healthcare, you know, apart from, you know, perhaps increased focus, I was just wondering if you could, you know, help us understand how splitting the business is going to, you know, change the growth trajectory here? 'Cause, you know, you've, you've obviously tried a few different things in Healthcare, so just wondering, you know, I guess, is this one last attempt or, you know, does it fit in the portfolio? Just some longer-term thoughts as well would be appreciated.

Christophe Beck (Chairman and CEO)

Hey, thank you, Manav. Good question on Healthcare. We will stay serving hospitals with what we do as a company, protecting what's vital, reducing hospital acquired infections, remains a point of focus. The fact that our Healthcare business has not been growing and has not making money, for quite a very long time, is something that I have committed to change. I made that commitment pretty clearly a year ago. What we're doing is a very thoughtful plan. Where quarter after quarter, I wanna make moves that are driving us to a place where it's a business that's growing nicely. It's not gonna be high growth, but that we get good profitability.

The first move was really so in Q1 to do this cost restructuring in North America and in Europe, so to get the right cost base. That's evolving, so pretty nicely. We on plan, delivering on that front, and I wanted to make a second step, which we announced a week ago to the organization and wanted to share with you as well in the release and on that call. We wanna have those two businesses, surgical, which is really focused on drapes, protecting surgeons, equipments and patients, which is very different than our infection prevention business, which is much more traditional Ecolab business of hygiene and disinfection, infection prevention. Those two businesses, we wanna have them separate. They're more focused.

They're serving 2 different parts as well, in the hospital. Most importantly, our infection prevention business, which is the one with the lowest profitability, cannot afford the cost structure that we have today. On the other hand, leveraging the huge sales force that we have in institution in North America, well, they get immediately a broader reach on the market because institutionally serving hospitals on the food service and hospitality side today already, and at the same time, get a huge boost in terms of cost productivity. We're improving infection prevention business performance, kind of almost overnight. It's gonna take, obviously, a few months to get there, but it's kind of a sure thing.

It's in our hands, while the surgical business, which is doing quite well and with good margins, is gonna remain a focused business. We have those two businesses in a better place, and that's the next step that we wanna execute towards our ambition to have a good Healthcare business ultimately.

Operator (participant)

The next question comes from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.

Shlomo Rosenbaum (Managing Director)

Hi, thank you. I actually wanna piggyback on Manav's question. Is the infection protection business gonna be kind of folded into institutional? If, if you're gonna be leveraging their sales and service organization, what is gonna be kind of standalone on its own? By separating these businesses, does it also make it easier if you can't get them to the place you wanna be, to kinda sell them off in bite-sized pieces?

Christophe Beck (Chairman and CEO)

A lot to unpack in your question here, Shlomo. I'm not gonna comment about, about the future. It gives us more options, let's put it that way. We'll have those two businesses. One, our surgical business, our drape business, is gonna be standalone with its own divisional structures, supply chain, so very verticalized, if I may say. The infection prevention business, we're gonna have the best of both worlds because we're gonna have a division that's focused on corporate accounts, on marketing, on innovation, R&D, really, so driving that business strategically, while commercial execution is gonna be done by Institutional, where you get much more reach and a much better cost structure as well at the same time.

Two focused businesses, surgical, totally verticalized infection prevention, a separate division, but leveraging Institutional as their commercial arm.

Operator (participant)

Our next question is from the line of Andy Wittmann with Robert W. Baird. Please proceed with your question.

Andy Wittmann (Senior Research Analyst)

Excuse me for taking my questions. I wanted to dig into the, excuse me, the Life Sciences performance in the quarter and your comments, Christophe, about how there's some short-term disruption in that marketplace. I, I was hoping you could elaborate on this, perhaps address, what's the cause of the short-term disruption? Perhaps maybe that's related to the prior few years with all the vaccines and COVID and other things like that. Maybe we just need to come off of that period. I don't know. If you could just talk to the confidence that you have in the recovery?

It sounded like it's not going to be necessarily right here in the 3rd quarter, and you said, I think maybe the comment was a few quarters, but any detail that you can give to support the return to that growth in Life Sciences, including whether that's the legacy Life Sciences business or the newer filtration business that you acquired a year or so ago.

Christophe Beck (Chairman and CEO)

Thank you, Andy. Life Sciences is a great business. It's been a great business, since we started in 2017, when we brought all the various pieces together. The future is even better because well, it's going to be the golden age of pharma, and biopharma is going to be the new way of producing drugs and vaccines going forward, as it's been demonstrated with COVID over the past few years. A great business that has delivered very well with a very good future. Purolite is a new element to that business, which adds drug filtration to it, as well as new capabilities to filtrate any other liquid, especially water in other industries, as we've mentioned.

The, the industry is a bit under pressure today. I feel pretty good, so with our flattish growth, because if I compare it to competition, which are great companies, by the way, well, their growth is way down. Being flattish, I feel pretty good about that. It's driven by what you mentioned. It's kind of still the outcome of the past few years, with COVID, COVID-related production, inventories as well, and in an industry that is basically getting ready so for the future. It's not gonna last long. It's gonna last a few quarters, so we don't gonna see a major pickup in Q3, but I think it's gonna happen over the next few quarters.

If anything, when I look back, so a year ago, how I was looking at Life Sciences, how am I looking at the market and the business today, well, I feel really good and even better with where we're going, which is why we decided to stay on offense. Even if the market is pressured for, for a while, it's not gonna last forever. For me, making sure that we can get more new customers, that we can build capabilities, which means expertise, people on the street, people in R&D, innovation, and at the same time, so building capacity as well, so to produce for the future, well, it's the best time to do it. That has an impact on the operating income margin.

That's okay because we know that that business is kind of north of 30%, on, on a long-term, run rate basis. It's worth doing it. A few quarters, a bit pressured, but we're gonna get to a better place, and that business is more promising than it's ever been. I feel good about Life Sciences.

Operator (participant)

Our next question is from the line of Patrick Cunningham with Citi. Please proceed with your question.

Patrick Cunningham (Vice President and Senior Analyst)

Hi, good afternoon. We're starting to see some deceleration on pricing. You know, what can we expect for normalized pricing going forward? Specifically on the water business, you know, you've highlighted the unique competitive position and customer sustainability objectives. Do you think that will translate into higher pricing power, you know, relative to historical pricing? Thank you.

Christophe Beck (Chairman and CEO)

2, 2 short answers, here, Patrick. The first one is, the deceleration of pricing, as you mentioned it, is 100% related to year-on-year comparison. The carryover, we've kept 100% of it, including the energy surcharge, by the way. On top of it, we're expanding, as well, new pricing, because we've become, as well, even better. We've always been good at pricing, as an organization, while over the past 2 years, we've become even better because it's been so much related to the value we're creating for our customers or the savings in their operations in dollar. We wanna make absolutely sure that net-net, it's a positive story for customers, which it is. That's the first answer. Entirely, the slowdown entirely related to a year-on-year comparison.

Carryover is stable, pricing is expanding, which leads to the second question of pricing. For, for the future, I don't know where it's exactly gonna shake out. We've been always within the range of 1%-2% in the past 10 years or pre this inflationary time. Post that cycle, whenever that cycle is over, is gonna be better than that. I don't know exactly what the number is gonna be, but it's gonna be north of 2, that's for sure.

Operator (participant)

The next question is from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Laurence Alexander (Research Analyst)

Good afternoon. It sounds as if the path to positive volumes in the back half is, you're widening the spread that Ecolab can get versus the end market. How do you see that developing in 2024, 2025? Do you think you can keep the new wider spread or expand it further? Do you see it this as a bit contracyclical, and as the end markets recover, maybe Ecolab's volume spread sort of compresses a little bit?

Christophe Beck (Chairman and CEO)

We see where we end up, in, in 2024. If I'm looking at currently, I'm pleased with the fact that we're better than the market. The fact that we're improving ex-Europe as well in Q2, and that we are in positive territory is a very good sign. I like the evolution that we're having in Europe as well. We have a great team doing very good work over there, Europe is gonna improve as well. Over time, new business is very strong, as mentioned earlier. It's really focusing on, on what we can control: new business, penetration, innovation, enterprise selling. Those are the old-fashioned, good ways of driving volume. We've been successful so far.

As mentioned, the last 2 years, we focused primarily our attention on pricing and margin. We shifted our attention primarily on volume, so a quarter or 2 ago, and it's working. Usually, those trends take a few quarters to take hold in our organization, but when we have good momentum, it remains as well. I feel positive about where we're going for the second half, for sure, and I see no reason why it shouldn't be good for 2024 as well.

Operator (participant)

The next question is coming from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Kevin McCarthy (Partner)

Yes, good afternoon. Perhaps a two-part question on the price-cost spread. Christophe, on the price side, would you call out any particular areas where you're seeing the most positive sequential momentum on price realizations and, you know, perhaps other areas where it's more of a struggle and, and starting to flatten out, sequentially? On the cost side, really a similar approach or question in that, are there particular areas you would call out where your costs are dropping fast on a sequential basis, and other areas where, you know, you have stubborn increases?

Christophe Beck (Chairman and CEO)

Yeah, Kevin, I'll give that question so to Scott. Before we get there, again, so mentioning and underlining how we look at pricing, it's really so twofold. It's on one hand, making sure we keep the carryover, that we don't give price back, and that's been working really well across the board. At the same time, that we can drive new pricing as well in all businesses, and that's been working very well as well, so in the organization. With that, I'll leave it up to Scott to give us some more insight.

Scott Kirkland (CFO)

Yeah. Hi, thanks, Kevin. Yeah, as we talk, as Christophe said, there's the, the carry-in pricing, the pricing we executed last year, which we said had peaked at the 13% in Q1, but continuing to derive that, that new pricing. Really, the pricing across the board, as I think about it by segment, very strong pricing across I&S, industrial, Healthcare, Life Sciences, and our other segments, which is mostly pesticides, as you're aware. Really strong pricing, both that we had in the, the carry-in, the structural pricing we did last year, as well as the, the new pricing that we're continuing to accelerate this year.

As I think about to your other question, from a, a cost perspective, DPC, you know, industrial took the, the lion's share of the, the cost increases over this inflationary environment over the last 2 years. That's where we're gonna see the, the biggest impact as that DPC costs have started to ease, which we talked about, in Q2, which was 5% relative to the 9% last year. As that continues to ease, we'll likely see the biggest benefit in industrial, just given that they took the lion's share of the increase over the last 2 years.

Christophe Beck (Chairman and CEO)

Kevin, I'd like to remind you of just 2 facts I mentioned before as well. With Industrial having reached in Q2 already the 2019 operating income margin, which is a very good sign, and INS, Institutional & Specialty in dollar terms, not in margins, being back to 2019 in the fourth quarter of this year as well. 2 big indications for our 2 major businesses that our margin recovery is really well on track, and it's not gonna stop there, it's gonna keep improving.

Operator (participant)

Our next question is from the line of Steve Byrne with Bank of America. Please proceed with your question.

Steve Byrne (Senior Chemicals Analyst)

Yes, thank you. I was curious to hear an estimate from you on what fraction of your sales would you say involve equipment at your customers that either you own, or that is proprietary to you, that would have to be removed if a competitor were to come in and scoop up that business? With respect to competitors, are you seeing any changes in competitive dynamics out there, such as, you know, the Solenis, Diversey combination? Are you seeing anything coming out of that?

Christophe Beck (Chairman and CEO)

A few questions in here. To unpack, Steve, first on the equipment question, just would like to remind you that 95% of our sales are recurring, so it's not equipment. By definition, this is chemistry or lease programs or digital subscriptions. Sales that you get recurringly on a monthly, on a weekly basis. The equipment component is really, really small. At the same time, since you have equipment in those customer location, well, it increases the stickiness as well, of our business with our customers. Not obvious to change, so from us to someone else, especially since equipment is not gonna be at the same level of technology to say the least.

This is not the way we're driving our business with our customers. We want them to stay with us, not because it's hard to change the equipment, but because they get the best service, the best customer experience, and most importantly, that their total cost of operation is going down because they reduce their usage of natural resources, carbon and water, and at the same time, as well as the labor. That's the way we drive our business, 95% recurring, less than 5% equipment. To you last question about the competitive situation, our competition is busy right now, but we take them very seriously, as we've always taken them.

The fact that our new business generation is doing really well, is a good indication, that we're kind of winning that war.

Operator (participant)

The next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Vincent Andrews (Managing Director and Senior Equity Analyst)

Thank you very much. I'm just wondering if you can give us a little more specifics on the volume by segment. I mean, I see what you said for the total company and on an ex-Europe basis, but can you tell us anything in particular about the key segments?

Christophe Beck (Chairman and CEO)

Yeah, Vincent. Generally, the volume profile is similar in every business. I like a lot what the Institutional & Specialty is doing. As mentioned so many time during that call, they are in positive territory and are keeping accelerating. They're at the forefront. They had the most to recover as well at the same time, but basically, doing really, really well. Industrial, let's not forget that they had a lot of work to do in pricing over the past two years. As mentioned before, being in a position to deliver similar margins in this quarter, in the second quarter, than what they had in 2019 is a remarkable accomplishment.

Now, so shifting over the last few quarters, on the new business, well, it's helping improve as well, the volume in industrial. I'd like to call out as well, that water in industrial has been positive, remains positive, and has a very good story as well here. The drag is in paper, which is mostly driven by our customers are reducing inventories, after all the past few years disruptions that they had. I like the new business that we have in paper, so paper is gonna improve as well. The inventory meltdown of our customers is gonna improve as well over the next few quarters.

All in, Institutional & Specialty are strong and getting stronger, industrial improving as well, with paper becoming better over the next few quarters. I've mentioned the other businesses are getting better as well as we move forward.

Operator (participant)

Our next question comes from the line of Scott Schneeberger with Oppenheimer & Co. Please proceed with your question.

Scott Schneeberger (Managing Director)

Thanks very much. I have one for both of you, a quick one for Scott. I'll ask them both up front. Scott, You mentioned headcount down, but SG&A pretty steady through the balance of the year on an absolute level. Is that incentive comp, which is the delta, and how should we think about that? Cause we had a few challenging years. This looks like a really good year. How should we think about that in the back half, and then going into next year?

Christophe, for you, thanks for, I was gonna ask on paper, but I also wanna ask on in the industrial segment, I think 'cause you just did you covered paper pretty well, but food and beverage, a big subsegment there, that's been double-digit growth for, gosh, a year and a half. Are you continuing to win a lot of new business? How does that trajectory look? Maybe, maybe, if you could, bear down a little bit into the submarkets, dairy, beverage, and brewing food, and just give us a little bit of color of, of the strength you're seeing. Thank you.

Christophe Beck (Chairman and CEO)

I guess, Scott, you start?

Scott Kirkland (CFO)

Yeah, Scott, I'll, I'll start on the SG&A question. Yeah, as I said, the, the big driver in Q2 of the SG&A increase was incentive compensation, would expect that similar level of sort of incentive compensation headwind as you, as you see it. Granted, it's, it's the reason for it is what we're performing very well, and rebuilding on that incentive compensation, expect that to be the, the biggest piece of the SG&A year-over-year for the second half as well. Certainly, as we've rebuilt on the incentive compensation, we'd expect it to be less of a headwind next year.

Really, more importantly, as we've talked about, continuing to drive this SG&A ratio, which we've done very well over the last few years, the 300 basis points, and would expect, although for this year, because of the incentive compensation, the SG&A sort of productivity or leverage will be more modest than we saw over the last few years. Would expect to continue to drive that leverage in the future, as especially as we're, we're leveraging the investments we made, the cost savings programs that we have, to continue to drive great opportunity on the SG&A productivity going forward.

Christophe Beck (Chairman and CEO)

The second part of your question, obviously, so different, so on our F&B business, one of our largest businesses. I'm really pleased with the work that the team has done in this in this business. They, they've been able so to work well on both growth and margin recovery. They've been impacted obviously by the inflationary costs on delivered product costs, but managed well to manage new business and the margin performance. Second, it's a positive industry, so it's serving consumer goods industries. You're familiar, so with most of them, they've done quite well over the last few years, and they're still doing well today. It's a good place to be as an industry.

The, the third point I'll make is that it's one of those industries that's very interested in what we do. It's about food safety, which is essential, so for them, it's non-negotiable, obviously, so for, for their brands, and our customers do very well with it. At the same time, they are the most advanced companies in terms of commitment on a carbon footprint, on water usage, on waste management, at a lower total cost, which is exactly what we do for them. They are very interested in what we do. The last point I'll make is, we have this unique position of bringing water management and food safety in one offering, which no company so today can offer.

We're uniquely positioned to offer that to our customers, and we perfect that model all the time, and I like a lot where we're heading because that's exactly what those customers are looking for, which are the reasons why this business is doing so well.

Operator (participant)

Thank you. Our next question is a follow-up from the line of John Roberts at Credit Suisse.

John Roberts (Managing Director)

Thank you. North American Healthcare Infection Prevention is going to use the commercial organization from Institutional. Do you have any other examples of, within Ecolab, of sort of cross-segment collaboration like that? Will that result in any inter-segment financial reporting?

Christophe Beck (Chairman and CEO)

Two parts of your question, John. On one hand, we, we will, for the time being, keep that reporting consistent with what we've done for now. I can't speak for the longer term, but for now, I wanna keep that consistency to keep the clarity. I made a commitment to you, that we will improve the Healthcare business. I truly wanna show the improvements that we're making. It's not by folding it in something else that we're gonna improve it. We're gonna remain consistent and transparent. Now, the second part of your question, on institution, and being used by other businesses.

The best example I can provide you is for QSR, so the quick-serve restaurants, McDonald's, Burger King, Wendy's, and so on, are always more using dish machine in order, so to automate the labor they have in their restaurant. As you know, QSR is a separate business, and it's been true for 30 years. It's not exactly a new thing. In here, well, the institutional team is the one that's serving those dish machines as well. It works really well because we get the reach because we have institutional everywhere in the country, and they get the cost productivity because of the critical mass and density that institutional is having.

What institutional is doing for QSR is kind of similar than what we're looking to do for Healthcare as well. It's a model that we've practiced in the past already.

Operator (participant)

Thank you. Mr. Hedberg, there are no further questions at this time. I'd like to turn the floor back to you for closing remarks.

Andy Hedberg (Director of Investor Relations)

Thank you. That wraps up our second quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation, and hope everyone has a great rest of your day.

Operator (participant)

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines at this time.