Ecolab Q3 2021 Earnings Report

Ecolab EPS Results

• Actual EPS: $1.38
• Consensus EPS: $1.30
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: $1.15

Ecolab Revenue Results

• Actual Revenue: $3.32 billion
• Expected Revenue: $3.26 billion
• Beat/Miss: Beat by +$65.21 million
• YoY Revenue Growth: +10.00%

Ecolab Announcement Details

• Quarter: Q3 2021
• Date: 10/26/2021
• Time: Before Market Opens
• Conference Call Date: Monday, October 25, 2021
• Conference Call Time: 8:00PM ET

Ecolab (NYSE:ECL) (NYSE:ECL) provides water, hygiene, infection prevention and technology solutions to businesses and institutions worldwide. Its customers include restaurants, hotels, hospitals, manufacturers, food and beverage companies, retailers and other organizations that rely on safe, efficient and sustainable operating environments.

The company’s offerings include cleaning and sanitizing products, water-treatment and process-management systems, food-safety programs, infection-prevention solutions and pest-elimination services. Ecolab also provides consulting, monitoring technologies and on-site expertise designed to help customers manage water use, protect public health, improve operational efficiency and meet regulatory requirements.

Founded in 1923 as Economics Laboratory, the company initially focused on cleaning products for commercial operations and later expanded into a broad provider of sanitation, water and industrial-process solutions. Ecolab serves customers across North America, Latin America, Europe, the Middle East, Africa and the Asia-Pacific region. The company is led by Chairman and Chief Executive Officer Christophe Beck.

Ecolab Q3 2021 Earnings Call Transcript

Key Takeaways

• Ecolab reported 10% reported and 8% organic sales growth in Q3, driving a 31% increase in free cash flow that more than offset significant delivered product and other cost inflation.
• For Q4, the company expects accelerating sales volume and pricing momentum to deliver double-digit earnings growth, despite an estimated $0.20 per share headwind from ongoing inflation.
• Ecolab is raising pricing multiple times a year and leveraging productivity actions and its digital automation capabilities to manage rapid raw material and supply cost pressures.
• The Ecolab Science certified and Net Zero programs, along with record-high new business wins, are driving a differentiated value proposition and fueling growth in new markets like data centers and Life Sciences.
• Institutional and Specialty segments delivered 24% and 17% growth respectively, while Healthcare and Life Sciences remain below exceptional pandemic levels but continue healthy mid-single to double-digit underlying trends.

Presentation

[Operator]

Greetings, and welcome to the Ecolab Third Quarter 2021 Earnings Release Conference Call. At this time, all participants are in a 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, Mike Monahan, Senior VP, External Relations for Ecolab. Thank you, Mr. Monahan. You may begin.

[Mike Monahan, SVP of External Relations at Ecolab]

Thank you. Hello, everyone, and welcome to Ecolab's Third Quarter Conference Call. With me today are Christophe Beck, Ecolab's CEO, and Dan Schmechel, our CFO. The discussion of our results, along with our earnings release and the slides referencing the quarter's 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.

[Mike Monahan, SVP of External Relations at Ecolab]

Starting with a brief overview, strong third quarter results were driven by robust new business wins and accelerating pricing, which, along with the continued recovery in the U.S. and improving European markets, more than offset significantly increased delivered product and other costs. Looking ahead to the fourth quarter, we expect both accelerating sales volume and pricing momentum to leverage an expected continuing, though uneven, global recovery. We expect these drivers to result in the fourth quarter showing better year-on-year sales growth than the third quarter. We have also experienced continued substantial delivered product and other cost inflation that we believe will increase fourth quarter costs by nearly $0.20 per share. As a result, we expect fourth quarter earnings to grow double digits, though not as strong as the third quarter.

[Mike Monahan, SVP of External Relations at Ecolab]

We expect to once again successfully manage the current inflation challenges and uneven global economic recovery to deliver very strong sales and earnings growth in 2021 as the strong volume and pricing gains, along with productivity and cost reduction actions, enable us to offset the higher costs and yield double-digit earnings growth. Recent programs, including Ecolab Science Certified and Net Zero, have further differentiated Ecolab's value proposition and enable us to help create better customer outcomes and reduced environmental impact while simultaneously reducing their costs. Our new business wins and innovative pipelines are at record levels. New market focus areas are positioned well to drive growth, and our leading digital capabilities continue to add competitive advantage. Our strong business momentum, along with enhanced value proposition and favorable macro trends, position us well to leverage the post-COVID environment and deliver further superior shareholder returns next year and for the future.

[Mike Monahan, SVP of External Relations at Ecolab]

Now here's Christophe Beck with his comments.

[Christophe Beck, Chairman and CEO at Ecolab]

Thank you, Mike, and good afternoon, everyone. Great to be together with you today. Q3 has been another very good quarter for Ecolab, demonstrating once again that Ecolab is in a great shape with strong top-line momentum and a proven ability to effectively mitigate the adverse effects of inflation and the so-called supply shortages. Underlying sales trends were strong across the board. In a complex environment, we delivered 10% reported and 8% fixed currency organic sales growth, driven first and foremost by continued strong momentum in Institutional and Specialty that delivered 17% sales growth in the quarter and 24% from the Institutional division. We also saw accelerated momentum in Industrial sales with 7% growth and 13% in other segments driven by sustained high performance in Pest Elimination.

[Christophe Beck, Chairman and CEO at Ecolab]

Healthcare and life sciences posted negative sales growth year-over-year as they compared to exceptional growth during the pandemic as we know. However, the respective underlying sales growth stayed on a healthy mid-single and double-digit trajectory. This top-line momentum, combined with accelerating pricing and structural productivity that's benefiting from our state-of-the-art digital automation, drove the strong adjusted EPS delivery, more than offsetting short-term impact from Hurricane Ida and the rapid acceleration of global cost inflation. The team did an exceptional job minimizing the impact of Hurricane Ida, which we were able to successfully manage to be a much lower impact than initially expected at only $0.03 in the quarter. Most importantly, the team mitigated the impact of additional significant supply shortages to ensure exceptional service to customers while driving continued new business wins and strong price increases, contributing to 31% increase in free cash flow.

[Christophe Beck, Chairman and CEO at Ecolab]

Current sales momentum is strong, and we expect it to accelerate. Strong new business and breakthrough innovation are expected to continue to drive top-line growth. Also, pricing will keep accelerating towards 4%. This strong volume and price momentum is expected to result in Q4 showing better year-over-year sales growth than what we've seen in Q3. At the same time, delivered product cost will keep increasing rapidly, which we'll continue to mitigate with great pricing. However, as we know with our model, this takes time to do well in a way that's sustainable long term and aligned with the incremental value we create for customers. We therefore estimate that the timeline between pricing and cost inflation will impact the fourth quarter EPS by approximately $0.20 versus what we expected just a few months ago. That too will address over the next few quarters.

[Christophe Beck, Chairman and CEO at Ecolab]

Net, we expect Q4 EPS to continue to grow double digits, though not as strong as in Q3, which will help us exceed the year with great momentum. With strong volume growth, continued pricing, and delivered product cost hopefully nearing its peak, we'll then enter 2022 in great position to deliver another great year for Ecolab. The strong fundamental business momentum combined with continued market recovery provides us with great confidence in the future and especially for 2022. In a world full of uncertainties, we keep driving strong business wins and a competitive differentiation. In a world where customers struggle to find reliable partners for innovation, especially product supply and expertise to help them run their operations efficiently and serve their customers safely, we have substantially strengthened our position as their clear, innovative and reliable global partner.

[Christophe Beck, Chairman and CEO at Ecolab]

In a world where our Institutional and Specialty customers and consumers especially are concerned about increased risks of infection, Ecolab Science Certified has become the reference that provides guests with the assurance they're looking for. In a world where environmental impact has become front and center, our Net Zero offering is providing industrial segment customers especially leading and innovative ways to deliver on their commitments while improving their own financial returns. All this provides us with confidence that 2022 will be another strong year for Ecolab, with sales and earnings growth above our long-term trends. With that, I look forward to your questions.

[Mike Monahan, SVP of External Relations at Ecolab]

Operator, please begin the question and answer period.

[Operator]

Thank you. We will now be conducting a question and answer session. We ask that you please limit yourself to one question and one brief follow-up question per caller so that others will have the chance to participate. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. One moment please while we poll for questions. Thank you. Our first question is from Tim Mulrooney from William Blair. Please proceed with your question.

[Tim Mulrooney, Equity Research Analyst at William Blair]

Christophe, good morning.

[Christophe Beck, Chairman and CEO at Ecolab]

Hi, good morning, Tim.

[Tim Mulrooney, Equity Research Analyst at William Blair]

Thanks for taking my question. My first one's on the guide. You know, it sounds like you expect organic revenue growth to accelerate in the fourth quarter, off an already strong result here in the third quarter. I know that some of that should come from better pricing, but are there other areas of the business, that you expect to accelerate in the fourth quarter as well? Could you talk about, you know, what some of those might be?

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah. Thanks for the question, Tim. You mentioned the pricing; we keep accelerating in Q4. We have to and we can as well. With the value that we're creating for our customers, that will help drive organic growth, obviously. Volume growth will keep accelerating as well in most businesses, Industrial being one good example. Institutional is gonna keep doing really well as it recovers. You will have as well, so Healthcare and Life Sciences that are gonna compare to easier comps last year than we had in Q3. All that brought together will bring us to a better place for Q4, probably nearing, say, the double-digit level.

[Tim Mulrooney, Equity Research Analyst at William Blair]

Wow, okay. That's even more than I was thinking. Thank you. Then quickly on margins. You know, I saw industrial margins took another step back this quarter, but I know you guys have talked about maintaining these margins and building upon the gains you made in 2020. My question is the step back primarily related to the raw material cost pressure? In other words, would you still be on track to hold the margin gains you achieved last year if not for those raw material cost pressures? I'm just trying to understand.

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah

[Tim Mulrooney, Equity Research Analyst at William Blair]

what a normalized operating margin should look like for that business.

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah, that's the good way to look at it. Normalized, the margins so will keep improving, actually. If we think mid to long term, the margin trajectory for Institutional so will become even healthier, going forward. Because when we talk about give back, we're not giving back anything. Pricing is going up quarter-over-quarter, in Institutional like in other businesses by the way as well. Volume is going up as well. It's kind of this short-term inflationary pressure, which is quite strong, which is growing so quicker than the way we price for all good reasons, since we wanna make sure that we keep all customers while we do that and that we drive so by, the value we create as well.

[Christophe Beck, Chairman and CEO at Ecolab]

Ultimately, when the delivered product cost curve is gonna ease, margin is gonna improve again, as you've seen last year, by the way, which was the end of another cycle as well in industrial.

[Tim Mulrooney, Equity Research Analyst at William Blair]

Very clear. Thank you.

[Christophe Beck, Chairman and CEO at Ecolab]

Thank you, Tim.

[Operator]

Our next question is from Manav Patnaik from Barclays. Please proceed with your question.

[Manav Patnaik, Research Analyst at Barclays]

Yeah, thank you. I was just hoping you could give us an update, you know, competitively, you know, in terms of, you know, I'm guessing everyone's raising prices and so customers are aware of that. But, you know, has the share gains moved one way or the other? Just curious if there's any updates there to provide.

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah. Hi, Manav. I wish that most competitors would be driving as much pricing as we do. It's unfortunately not exactly the case which, thank God, we drive pricing based on the value we create. We have a good discussion with our customers saying, "We have opportunities to add value in your own productivity, and we will get part of that as well." Going forward, if I look at most of the competitors in most of the businesses, they're all behind us in terms of price evolution. We see ourselves as being the leader in most of those industries as well. We need to show the way as well. Part of the reason, but ultimately I wish that they would be a bit stronger as well in terms of price evolution.

[Manav Patnaik, Research Analyst at Barclays]

Got it. You know, just regionally, you know, in Europe, you know, versus your bigger competitor there or, you know, any update to how your recovery in Europe is progressing?

[Christophe Beck, Chairman and CEO at Ecolab]

It's generally quite good. The recovery was a little bit steeper in Europe than in the U.S. because as you know, they went from kind of totally locked down to almost totally opening it up, which was different in the U.S. Then you have a bit of the bumps in the U.K. or in Germany because case numbers are going up. Generally, the trends are quite positive and our international business, Manav, is growing positively as well. Keep in mind that last year we were flat as well, so we were not declining in international. Having a positive growth this year is a good indication that things are recovering quite nicely.

[Manav Patnaik, Research Analyst at Barclays]

Got it. Thank you.

[Christophe Beck, Chairman and CEO at Ecolab]

Thank you, Manav.

[Operator]

Our next question is from David Begleiter from Deutsche Bank. Please proceed with your question.

[David Begleiter, Managing Director at Deutsche Bank]

Thank you. Good afternoon.

[Christophe Beck, Chairman and CEO at Ecolab]

Good afternoon.

[David Begleiter, Managing Director at Deutsche Bank]

Christophe, just on, price versus raws, when do you expect to fully catch up to these higher raw material costs?

[Christophe Beck, Chairman and CEO at Ecolab]

David, if you just take the dollar value year to date, we are ahead already, which is really so in the Ecolab model. It's not within the quarter, but if I take year to date, pricing is ahead of the delivered product cost dollar pressure. For the most part, we will remain ahead. It's not a perfect science, but it comes in lockstep. To me, the main objective is making sure that we can drive margin %, and that takes more time, obviously so to get there because the inflationary pressures grow faster than our pricing capability.

[David Begleiter, Managing Director at Deutsche Bank]

Very good. I know it's early for next year, but as we approach November, do you have some early thoughts on how to think about the earnings or progression for next year?

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah, it's very early, as you say, David. I think first, on the inflation side, I believe it's gonna be very similar to the pressure that we have or that we are experiencing in 2021, and that's why the pricing evolution that we have this year, roughly 2%, we're expecting to get towards 4% next year, will be a good equation, at least so over time. Generally, for the trends for 2022, when I just step back a bit, I think it's gonna be fairly consistent with what we've seen in the second half of the year.

[Christophe Beck, Chairman and CEO at Ecolab]

Overall, it's gonna be probably better than what we've seen, pre-COVID, if I may say, so kind of good top-line momentum, with good leverage with it.

[David Begleiter, Managing Director at Deutsche Bank]

Very good. Thank you very much.

[Christophe Beck, Chairman and CEO at Ecolab]

Thank you, David.

[Operator]

Our next question is from John McNulty from BMO Capital Markets. Please proceed with your question.

[John McNulty, Managing Director at BMO Capital Markets]

Yeah, thanks for taking my question. Just on the topic of the institutional business, can you speak to where you are from a volume perspective relative to 2019 for your third quarter?

[Christophe Beck, Chairman and CEO at Ecolab]

It's a good question. I'll need some help for that. We are recovering very nicely in Institutional in general. Maybe just to give you an idea of the trajectory, we expect to be ahead of 2019 kind of early 2022. I don't know which month that's exactly gonna be. That's depending on a bunch of things. Generally, we see that in the next 3-6 months, it's gonna happen for sure. Right now, we are kind of roughly in Q3, 11% down in volume, and we will be expecting to be close to 2019 early 2022.

[John McNulty, Managing Director at BMO Capital Markets]

Got it. Okay. You've come back a good bit of the way. I guess as a follow-up, you know, you mentioned a bunch of labor issues for a handful of your kind of general customer bases. Can you speak to how much of an issue that is for them? How does it impact the overall growth of, you know, for that business to recover? Then also maybe some of the solutions that you can provide, you know, some of these customers that help them with their labor issues.

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah, it's a great question because it's a real challenge for the industry, not just for our end customers and really specific to Institutional here. The whole distribution channel is also struggling with that, getting trucks unloaded from our plant to distribution center, and then afterwards getting the picking right as well. For our customers, it's an interesting world out there. I'd like to say as well, what's really important is that most, if not all of our customers, including the distributors, are clearly underlining our service quality. We've done huge efforts to make sure that we can deliver to our distributors and to our customers, which is first and foremost what needs to happen, especially with Hurricane Ida.

[Christophe Beck, Chairman and CEO at Ecolab]

That didn't help, but I think that we've ended up in a very good place in terms of service level. Now to your question, on the staffing. If you just look at the numbers, a bit here, so institutional business up 24%, so very good progression. We are almost at same level as 2019 in terms of customers that we're serving. As well, we have our restaurant sales that not even 10% down, so versus last year when the dine-in foot traffic is down over 20%. Generally, we're doing very well versus the market. At the same time, when you go to restaurants, you see that they can't serve all the tables, or they can't be open every single day of the week as well.

[Christophe Beck, Chairman and CEO at Ecolab]

It's basically showing an indication that we could be even better or will be better the moment that they get sort of the staffing right. Last but not least, to your point on how we help them get there. Obviously, the service that we provide so on a regular basis going there is very helpful for them because if the kitchens, if the housekeeping, if the warewashing is not done properly, it's even worse because they usually don't have people who can truly do the work since they're all new, changing so often as well. That's problematic. We provide a lot of products as well that need much less labor as well at the same time. You think about the disinfectants we talked about against COVID, you don't need to rinse for instance as well.

[Christophe Beck, Chairman and CEO at Ecolab]

You save a lot of time, doing the same work that other companies offer. That's helping as well with the labor shortage.

[John McNulty, Managing Director at BMO Capital Markets]

Got it. Thanks very much for the color.

[Christophe Beck, Chairman and CEO at Ecolab]

Thank you.

[Operator]

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

[Christopher Parkinson, Managing Director and Senior Industrials Equity Research Analyst at Mizuho]

Great. Thank you very much. You're clearly not only enthusiastic on, but you are executing on the share gain fronts, which seems to be across the portfolio. What's the primary driver here? Is it enterprise selling, as you've spoken in the past, new platforms like Science Certified, digitization, new customers' desire to go with the brand name? If you could just briefly dissect, you know, the recent success, you know, and what underscores your multi-year confidence, it would be greatly appreciated. Thank you very much.

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah, you're welcome, Chris. There are a few drivers. The main one we have is really sort of the new business generation. It's not new. You're familiar with that. We have close to 1,000 people managing corporate accounts, as we call them, and we're very proud of that team. Net new business generation is at an all-time high, which is good because it's the pipeline of new business as well for the future. It's driven by two main drivers, if I may say. One you mentioned, it's the Ecolab Science Certified, especially on the Institutional side. Customers are looking for ways to provide the right confidence for their own customers, their guests, as they call them. Science Certified requires the full Ecolab program to be certified.

[Christophe Beck, Chairman and CEO at Ecolab]

Well, that means higher penetration of most of the solutions, also. We get more units and more solutions within the existing units in order for those customers to get to the certification. One of the latest, as I mentioned on Investor Day, is McDonald's, which has been a great story with them endorsing Science Certified. On the industrial side is our Net Zero program, which is getting some very interesting traction, because many of our customers, if not most, have made a lot of sustainability commitments out there that some of them have a hard time to reach or get closer to stay on track for that. They need our help even more in order to get to their own commitment. That's helping generate as well new business.

[Christophe Beck, Chairman and CEO at Ecolab]

Last but not least, you know, new engines like data centers and high tech are extraordinary growth drivers, really addressing new needs that existed pre-pandemic, but the pandemic has given a huge boost to cloud computing, as we all know, since we're all using these virtual technologies. Well, that's driving our own business as well at the same time.

[Christopher Parkinson, Managing Director and Senior Industrials Equity Research Analyst at Mizuho]

That's very helpful. Just as a very quick corollary to that, just turning to European Institutional, you know, recently it was a little bit sluggish versus its regional peers, but it seems to be edging, you know, in the right direction. Can you just briefly comment on what trends you're seeing there across the region, share gain opportunity, and just your ability to you know, further drive margins higher across the region? Thank you very much.

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah, good question, Chris. We've done the last 10 years, and you've been following us for a long time, a lot of fundamental work in Europe for all our businesses. When you think about it, 10 years-ish ago, we were making no money as a company in Europe. Now we are in the low teens, 13%-14%, in that region. That's been a remarkable profitability improvement. Interestingly enough, Institutional has not made as much progress as all the other businesses in Europe because there was so much fundamental work that had to be done in terms of organization, in terms of systems, in terms of leadership, in terms of innovation. Well, it's taken us more time, but I would say the pandemic has helped us in a way.

[Christophe Beck, Chairman and CEO at Ecolab]

It hurt us short term, obviously, when everything was shut down. Ultimately, our customers have seen that they needed a partner that could help them provide the assurance to their guests, which was new. That was not exactly the focus they were having pre-pandemic. Now, we're getting the fruit of all the work we've done over the past few years where customers are recognizing that, well, we're adding value that other suppliers can't provide.

[Christopher Parkinson, Managing Director and Senior Industrials Equity Research Analyst at Mizuho]

Great. Thank you.

[Christophe Beck, Chairman and CEO at Ecolab]

Thank you.

[Operator]

Our next question is from John Roberts with UBS. Please proceed with your question.

[John Roberts, EVP at UBS]

Thank you. Just a little clarification on the labor comments, the customer labor comments that you made earlier. Do you have any lost revenues because the customers don't just don't have enough staff to do all the cleaning that they, you know, would prefer to do?

[Christophe Beck, Chairman and CEO at Ecolab]

Absolutely. When restaurants are open, John, three days a week instead of seven or whatever their schedule is, well, this is lost revenue for them, and this is lost revenue for us. The good news is that, well, they're gonna open up at some point, as they did pre-pandemic as well. That's gonna help us as well.

[John Roberts, EVP at UBS]

No, I meant just, they're opened, but they're short-staffed while they're open, and so cleaning is getting deprioritized.

[Christophe Beck, Chairman and CEO at Ecolab]

It was the case, John, early on. It's evolving quite nicely because you and I being guests in hotels and restaurants, while we had some understanding for the lower cleaning standards during the pandemic, we're paying the same price at the end for a room or for a meal, so we expect as well, so a similar quality of service and of cleanliness as well. This is something that's coming back progressively, but the labor shortage is hurting that. The trends are good. It just takes time to get back to the right place.

[John Roberts, EVP at UBS]

I don't think healthcare and life science is very seasonal, so could you talk a little about the sequential change on a sequential basis? I assume hand sanitizers were still down sequentially. I don't know when that bottoms and you get up comps and what was offsetting that.

[Christophe Beck, Chairman and CEO at Ecolab]

A few things here. You're right. It's not really a seasonal business. That's not the way we look at it, for sure not. Last year was an exceptional year because of demand and because of a lot of government-driven demand for hand care sanitizers, and all those products ultimately saw exceptionally high back then. If you just look at the Q3, sales were 17% down versus last year, but they were up 8% versus 2019 if you just do the math. In terms of mix and not so much seasonality, what's driving profitability in healthcare is mostly the surgical part.

[Christophe Beck, Chairman and CEO at Ecolab]

COVID, as you know, so has shifted away, the elective surgeries, which has shifted our business as well, so towards a lower profitability type of business. This is short-term. It's driven by COVID. The moment that surgeries are coming back, ultimately, we'll have the double combination, first on seeing growth, because we will be comparing against a more normal, period. Second, profitability is gonna come very naturally back because surgical is gonna come back as well.

[John Roberts, EVP at UBS]

Thank you.

[Christophe Beck, Chairman and CEO at Ecolab]

You're welcome, John.

[Operator]

Our next question is from Gary Bisbee with Bank of America. Please proceed with your question.

[Gary Bisbee, Senior Equity Research Analyst and Managing Director at Bank of America]

Hey, guys. Good afternoon. I want to go back to Institutional for a minute. You know, I think versus 2019 pre-pandemic, if you adjust for currencies in the last two years, the business, the Institutional segment remains 8% below pre-pandemic revenue levels in the quarter. You know, you commented you thought volumes in the next 3-6 months would get back to pre-pandemic levels. Does that equate to that revenue gap getting back to pre-pandemic levels, or are there other puts and takes that could lead revenue to take longer? And as part of that, you know, I guess I also wondered, you know, what sort of unit level, customer level do you think you'll be at when revenue gets to pre-pandemic levels?

[Gary Bisbee, Senior Equity Research Analyst and Managing Director at Bank of America]

you know, I ask that from the perspective of you've talked about more products per unit, particularly for those clients that are using Ecolab Science Certified. Thank you.

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah. Gary, big picture, as mentioned earlier, Institutional expected so early 2022, so to get back to 2019 levels at the top line level. I don't know exactly which month that's gonna be, but within the next six months, it's gonna be the case, which is a very steady and healthy recovery. With that, the fact that we had very good new business, well, that's gonna be installed as well in the months to come. If today we have almost the same number of units and the same number of solutions within units out there, well, it's gonna compound. Afterwards, once we get more units, more days that are gonna be open, more staffing in the restaurants as mentioned as well before.

[Christophe Beck, Chairman and CEO at Ecolab]

All those elements ultimately are gonna help Institutional accelerate versus what we saw in 2019 pre-pandemic, as well. On top of it, you have pricing that's also evolving in the right direction, as in every business that we have in the company that's gonna add to it as well. Last but not least, from an earnings perspective as well, Institutional has done remarkable work in terms of field organization, system implementation that really help as well drive an even better leverage in that business. Overall, trending in the right direction. It's gonna take a few quarters in order to get there, but I feel confident that we're really on a good path.

[Gary Bisbee, Senior Equity Research Analyst and Managing Director at Bank of America]

Okay, great. You know, you've talked a lot about your own pricing and how you're handling the raw material pressures. You know, if we just think supply chain in general, not so much the cost and pricing angle, but are you seeing any volume issues of your own, or do you feel like any of your customers in any of the segments are really being impacted in the volumes they're using based on, you know, the widespread supply chain challenges that are going on globally? Thank you.

[Christophe Beck, Chairman and CEO at Ecolab]

To a certain extent, yes. There's the labor shortage, as we mentioned before, but that's not the one that you're talking about, obviously here. Take the example of the car industry. Autos. The chip shortage that's happening out there, well, it has nothing to do with our own operation, but it's reducing the demand just because there are less cars being produced because they can't produce them because of the chips, ultimately out there. That's one. That's something we can't control, obviously. What we can control, though, is making sure that we can supply our customers in a way that doesn't stop or impact their own operations.

[Christophe Beck, Chairman and CEO at Ecolab]

In this crazy world of shortages and hurricane and Texas freeze and you name it, ultimately not one customers have had to stop ultimately because of what we were not able to supply. I've met a bunch of CEOs over the past few months as well, and all have been very complimentary as well in our ability to serve them in a difficult environment. Net-net, yes, it's not helping growth. If there were no shortage, we would be probably growing faster. I don't think that it's a major impact on us.

[Gary Bisbee, Senior Equity Research Analyst and Managing Director at Bank of America]

Thank you.

[Operator]

Our next question is from Vincent Andrews with Morgan Stanley. Please proceed with your question.

[Vincent Andrews, Managing Director at Morgan Stanley]

Thank you and good afternoon, everyone. A bit of a follow-up on the supply dynamics. You know, when you speak to your suppliers these days, you know, how much of the issue at this point and as we look into 2022 is still that they're struggling to get their plants back up and running at a full run rate versus just that the broader customer base you know very much wants to rebuild inventory and is also probably seeing very good demand? Is it how much of a risk do you see that either, A, there's another run-up in raw material costs, even as supply normalizes, just because people want to rebuild inventory, or, B, just that the raws stay stickier at these higher levels well into or through next year?

[Christophe Beck, Chairman and CEO at Ecolab]

Well, the short answer is that I think it's going to last 12+ months what we're experiencing now, and that's the way we organized, that's the way we're addressing it, that's the way we're planning for it as well. Supply shortages are going to be here for a while. You're familiar with the China-U.S. transport issues that are existing as well. There are many suppliers as well in the U.S. who have gone through force majeures as well over the past few months, sometimes for great reasons and sometimes not so much, just to get some more margins as well with costs going up as well.

[Christophe Beck, Chairman and CEO at Ecolab]

The way we're thinking through that is that, as mentioned earlier, I expect the inflationary pressure in dollars in 2022 to be very similar to the one in 2021 with a kind of easing, plateauing during the second half of next year, which is why on one hand thank God we've gotten very well organized in order to become more resilient, in order to make sure we can supply our customers. Second, that we're doubling our pricing, so from 2%-4%, 2021 versus 2022, in order to address that. If the world gets better earlier, we're all going to be happier.

[Vincent Andrews, Managing Director at Morgan Stanley]

Okay. Thank you very much.

[Christophe Beck, Chairman and CEO at Ecolab]

You're welcome, Vincent.

[Operator]

Our next question is from Laurence Alexander with Jefferies. Please proceed with your question.

[Dan Rizzo, VP and Research Analyst at Jefferies]

Good morning. Good afternoon, guys. It's Dan Rizzo for Laurence. Just in terms of the pricing that we've talked about a lot, is there situations where there's pricing rebates or pricing givebacks if things were to ease dramatically? I mean, obviously that's not expected, but if the world changes in, I don't know, six months, nine months, would you give pricing concessions?

[Christophe Beck, Chairman and CEO at Ecolab]

Overall, we don't, Dan. You know, we're serving three million customers in the world, so I won't say that it's the case for 100% of all those locations that we're serving. But generally, if you look at just the last 10 years, Ecolab never went backwards in pricing. You have years with higher pricing and some with lower pricing, and on average, you get to 1% plus something like that, which is a good indication of the fact that pricing is something that we hold going forward. Why that is because we always link the pricing that we're asking with the value that we're creating for our customers, how much dollar value we've helped them create by reducing the usage of natural resources, their improved productivity, reduced waste and so on ultimately.

[Christophe Beck, Chairman and CEO at Ecolab]

That doesn't go away when the raw materials go down, ultimately, which is on one hand the reason why pricing is always gonna go up. Second, that the margins ultimately, so for the company, gets better because, you get lower input cost for a price that keeps going up as well. Last point is, innovation, as well, which is always brought on the market with higher margin. That helps as well improving the leverage, in a much more natural way.

[Dan Rizzo, VP and Research Analyst at Jefferies]

That's really helpful. Just one clarification on something you said before. Did you say that you expect the raw material or the inflationary environment to last for all of 2022 or most of 2022? Did I catch that right?

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah. I wish I could know exactly, but I'm saying the next 12 months it's gonna be the case, and that's the way we're planning, that's the way we're getting organized. I think it's gonna ease the second half of next year. When is it gonna start? How much is it gonna be? I don't know. We're planning with the fact that it's gonna be a tough year next year in terms of inflation, and if it gets better, then okay. It's gonna make everything easier.

[Dan Rizzo, VP and Research Analyst at Jefferies]

Okay. Thank you very much.

[Christophe Beck, Chairman and CEO at Ecolab]

You're welcome.

[Operator]

Our next question is from Eric Petrie with Citigroup. Please proceed with your question.

[Eric Petrie, Chemicals Analyst at Citigroup]

Hi. Thank you, and good afternoon, Christophe.

[Christophe Beck, Chairman and CEO at Ecolab]

Good afternoon, Eric.

[Eric Petrie, Chemicals Analyst at Citigroup]

Which segments of industrial have you seen the greatest initial interest in your Net Zero program?

[Christophe Beck, Chairman and CEO at Ecolab]

That's a great question. It depends when, Eric. The ones over the last few years have been the food and beverage customers. Those are the consumer goods brands that are the most on the leading edge because their own consumers are asking them to behave the right way in terms of environmental protection and natural resources usage. The ones that are the most forward-looking, interestingly enough, are the high-tech companies like Microsoft who have put the most ambitious commitments by 2030. You've read that. They wanna be carbon positive and water positive as well, which means kind of giving back all they've used since the beginning, being in operations, whenever that was, early 1990s, as Microsoft.

[Christophe Beck, Chairman and CEO at Ecolab]

There we use a lot of new technology for that. The last one I'll just mention, Eric, which is becoming very interested that was not interested six months ago, interestingly enough, is downstream in oil and gas because while investors and consumers are truly asking them so to shift, and those ones are coming to us, and they did not twelve months ago. Very different types of industries, but the trend is clearly going all in the same direction.

[Eric Petrie, Chemicals Analyst at Citigroup]

Thank you. A question on Ecolab Science Certified.

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah.

[Eric Petrie, Chemicals Analyst at Citigroup]

I think the program was launched sometime in third quarter of 2020. When do you think you'll reach a point of market saturation or where the program doesn't add to top line?

[Christophe Beck, Chairman and CEO at Ecolab]

That's a great question. I hope never. Well, there's 100% somewhere, obviously. Interestingly enough, you know, we have today 33,000 locations that are Ecolab Science Certified in the U.S. and we're serving so close to 200,000 locations. There's a lot of runway, and that's just in the U.S. We're expanding in Canada in the U.K. Right now it's easier because it's the same language, so for the most part as well, and then we have the rest of the world. We're careful in expanding internationally because since it's a new program, as you mentioned, launched mid last year, really want to understand how it works, how it's perceived, what's right, what's not right, as well.

[Christophe Beck, Chairman and CEO at Ecolab]

I think that the runway is quite long, and it's been much more successful than I thought it would be. Initially, I thought it would be just COVID related, while this is not the case. Interestingly enough, lodging customers or hotel are becoming increasingly interested in that program because guests wanna have so that feeling of well-being when they go to a hotel. The same for offices as well. Those are new opportunities that we didn't think about early on that adds ultimately so to the accessible market that we have in front of us.

[Eric Petrie, Chemicals Analyst at Citigroup]

Thank you, Christophe.

[Christophe Beck, Chairman and CEO at Ecolab]

Thank you.

[Operator]

Our next question is from Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

[Kevin McCarthy, Partner at Vertical Research Partners]

Yes, good afternoon. Christophe, I was wondering if you could talk through the hurricane impacts. It looks as though the impact is expected to be half of what you thought it might have been on September thirteenth, and your prepared remarks suggest you tackle that through pricing and productivity. I was wondering if you could address each of those things and provide some more color as to how you went about mitigating that.

[Christophe Beck, Chairman and CEO at Ecolab]

Great question, Kevin. Well, it's, you know, our practice is when we see something happening that was not planned, we always get to you as quickly as we can to be transparent with what we see at that moment. The downside of that practice is obviously a week or two later if things have changed, for the better, in that case. Well, the forecast is a bit different, as such. To give you some color on the Hurricane Ida, we have systems showing where the hurricanes are gonna go through, what's the path of the hurricane. We initially thought that it would really avoid one of the large plants that we have in Louisiana, in Garyville.

[Christophe Beck, Chairman and CEO at Ecolab]

Well, unfortunately, a few hours before, it changed, and it hit exactly one of our main plants in the U.S. With the damage we had there, we thought the plant would be closed for three months. Our supply chain team that fortunately or unfortunately, depending on how you want to look at it, so has had a lot of practice this year with natural catastrophes as such, well, has brought all the teams we had, so from other plants as well, in order to help them rebuild part of the production lines that had been damaged because you couldn't find contractors in the area either for all the reasons we know. Well, that has helped us to reduce the three-month stop to three weeks, ultimately.

[Christophe Beck, Chairman and CEO at Ecolab]

Well, that has been great for our customers first and foremost, and second, it's allowed us to reduce the impact quite dramatically. That's an additional point to the ones you mentioned.

[Kevin McCarthy, Partner at Vertical Research Partners]

I see. As a brief follow-up, have you implemented incremental price increases over the last few months? I guess regardless of the answer, how would you expect price contributions to trend in 4Q versus 3Q?

[Christophe Beck, Chairman and CEO at Ecolab]

The short answer is that we've gone to so many customers three times this year. Usually in normal times, whatever that truly means, we do that once a year, and it's a very natural practice that the company has, where we discuss the plan for next year, how much value we're creating for the customer, what's going to be our share of that, in other words, so the price that we're going to get for it as well and making sure that the returns for customers are improved. That's normal practice once a year. We did three times on average this year, so very unusual. I assume it's going to be similar next year, so between one and three times. It's going to be more than one that I'm sure.

[Christophe Beck, Chairman and CEO at Ecolab]

We go for a bunch of pricing rounds. Now to your question, Q4 versus Q3, we're heading towards 4%, to enter 2022. Is it going to be the full quarter in Q4? I'm not totally sure yet. It's going to happen sometime during the fourth quarter. Depending on when we get it done, it will be for the full quarter or it's going to be as we enter 2022. I have a high confidence level that we're going to get the pricing that we're looking for.

[Kevin McCarthy, Partner at Vertical Research Partners]

Very helpful. Thanks so much.

[Christophe Beck, Chairman and CEO at Ecolab]

You're welcome.

[Operator]

Our next question is from Rosemarie Morbelli with Gabelli & Company. Please proceed with your question.

[Rosemarie Morbelli, Portfolio Manager at Gabelli & Company]

Thank you. Good afternoon, everyone.

[Christophe Beck, Chairman and CEO at Ecolab]

Bonjour, Marie.

[Rosemarie Morbelli, Portfolio Manager at Gabelli & Company]

Christophe, looking at the price of oil having reached $80 a barrel or thereabout, do you see that already beginning to help your downstream business? Still on the downstream side, how is your Net Zero category going to help them? Which areas are you focusing on?

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah, great question. The high price of oil so makes some people happy in our organization. That's the downstream team and most of the rest of the company a bit less happy because that's an input cost that's going up. Net-net, okay, it's okay. We know how to manage that, generally. You've seen downstream when up in Q3 2%, so we've crossed the bar of the zero, which is good. We see so really good evolution in downstream. Yes, the price of oil is helping on the demand. They've done some very good work as well in our downstream team in terms of new business. This is helping and not directly related to the price of oil for sure.

[Christophe Beck, Chairman and CEO at Ecolab]

When you talk about the Net Zero, it's very interesting early discussions, as such. To take one example of one European company actually with whom we are working on that Net Zero program, they're basically saying, you know, "You need to help us improve the environmental footprint of our old energy, which is the refining part, before we can focus on the new energy, the renewables, as such." We've really helped them understand that by reducing the water consumption in a refinery, which by the way is the number one natural resource that's being used in a refinery. Well, you reduce the energy usage as well, electricity, so for the most part as well.

[Christophe Beck, Chairman and CEO at Ecolab]

They reduce their water consumption, they reduce their carbon footprint by doing it, and they reduce their cost, as well as operation. Interestingly enough, it's an industry that was not so much interested in even having that discussion. That has changed dramatically, and that's helping creating new demand for us.

[Rosemarie Morbelli, Portfolio Manager at Gabelli & Company]

Okay. Thanks, that is helpful. Looking at Europe, which you know very well since you-

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah.

[Rosemarie Morbelli, Portfolio Manager at Gabelli & Company]

Ran it for a while, if my memory serves me right.

[Christophe Beck, Chairman and CEO at Ecolab]

That's right.

[Rosemarie Morbelli, Portfolio Manager at Gabelli & Company]

Well, I understand that you will never get the institutional business to reach the level of the institutional, you know, high-end, under normal circumstances in North America. What is the difference other than the fact that you have multitude of countries and different advertisements and so on? Is the competitive arena also very different? What is your new management there doing to offset some of that?

[Christophe Beck, Chairman and CEO at Ecolab]

Yeah. You said it the right way. We will not reach the profitability level of the U.S. because it's not one country and the complexity is bigger. As you mentioned, the languages, logistics, regulatory and so on, that's a cost of doing business that's higher than in the U.S. That's true for most companies, obviously. That's not the reason why we shouldn't get close to it. We had to really do some fundamental work over there in getting our structure right, getting our talent right, getting our logistics right. Most importantly, we can't forget that 10+ years ago, institutionally in Europe was a product business.

[Christophe Beck, Chairman and CEO at Ecolab]

We were selling products versus programs and outcomes in the U.S. because it was a joint venture with a consumer goods company 10+ years ago that we had over there. Well, that's a major culture shift as well so for our team that needed to happen. We are a patient company. You know that we've been working on businesses for years. Take pest elimination, took us 10 years to bring it profitable, and now it's one of our most profitable businesses globally that we have. I feel confident that in Europe, we will get to a very healthy place, even if it's not at the level of the U.S., it's gonna be a very solid business down the road, but it's still gonna take some time.

[Rosemarie Morbelli, Portfolio Manager at Gabelli & Company]

Okay. [Non-English content]

[Christophe Beck, Chairman and CEO at Ecolab]

[Non-English content]

[Operator]

Our next question is from Scott Schneeberger with Oppenheimer. Please proceed with your question.

[Scott Schneeberger, Managing Director at Oppenheimer]

Thanks very much. Good afternoon. Christophe, just kind of taking a question off something you just mentioned. The other segment, the margin really rebounding strongly, and it's now above the 2019 level, despite commentary end markets have not fully recovered. I'm just curious if you could delve in a little bit to what is driving the margin in other and where that possibly could go since we're now above 19x.

[Christophe Beck, Chairman and CEO at Ecolab]

You know that we have in our other segments, you have a combination of different businesses, obviously. Pest elimination being the bigger and best one. You have textile care that's in there, and you have our CTG, our Colloidal Technology Group. Very different businesses, obviously. It's hard to talk about an average as such. The main driver is pest elimination that has done a remarkable work during the pandemic, by the way. They've recovered very quickly during 2020 and kept growing as well in 2021, and at the same time have managed as well to improve their profitability versus 2019, 3.5 percentage points, as such. Large business growing very nicely, profitable and getting more profitable.

[Christophe Beck, Chairman and CEO at Ecolab]

Obviously, you get a lot of leverage, and, Scott, that drives the good results that you've seen in our so-called other segments.

[Scott Schneeberger, Managing Director at Oppenheimer]

Excellent. Thanks. Appreciate that. Then in my follow-up, I wanna kinda delve into the supplemental in the summary section. There's commentary expecting to enter 2022 with solid momentum, driving strong top, bottom line through product and service innovation, digital solution, new markets, and appropriate pricing. Just curious, Christophe, is it at this point can you elaborate on new markets in that sentence, specifically what you had in mind? If not, I'll have a follow-up. Yeah, just want to delve on that. Thanks.

[Christophe Beck, Chairman and CEO at Ecolab]

It's kind of all of the above starting first with new business. It always feels a bit mundane, but we have this mantra in the company that in doubt, go and sell something. It's really so having everyone trying to sell new customers, new solutions to existing customer. This is job one, and we want to make sure that we don't lose, obviously. That's that part. Interestingly enough, when you do more pricing, that has an impact as well on how much new business. It's not a perfect science, but we manage that reasonably well or very well, if I may say. In terms of new markets, you know, I'll mention a few.

[Christophe Beck, Chairman and CEO at Ecolab]

The one I expressed before, our data center business, which is driven by the whole boom of cloud computing. We've created that high tech division, which is really dedicated to those companies with their own needs, uptime, quality, cybersecurity, and all that, which is growing extremely fast. That's one of the new markets. Animal health is another one, which has been hit a bit by the pandemic and some difficulties in some countries. Ultimately, that's also one that's gonna grow very fast in the years to come. Most importantly, you have life science, which is a business that we created five years ago. It's a $300 million business growing double digit with extremely high profitability, as well.

[Christophe Beck, Chairman and CEO at Ecolab]

This one is just at the beginning of its growth story. As you know, life science is serving mostly the pharma industry, which is a trillion-dollar industry growing double digit. For me, we have so much to offer to that industry. I think that's gonna be the number one new market, to use your term, that's gonna help us grow as well next year and the years to come.

[Scott Schneeberger, Managing Director at Oppenheimer]

Excellent. Sounds good. That's what I expected to hear. Just want to make sure there wasn't anything geographical, perhaps expanding. I'll turn it over. Thanks so much, Christophe.

[Christophe Beck, Chairman and CEO at Ecolab]

You're welcome.

[Operator]

Our next question is from Shlomo Rosenbaum from Stifel. Please proceed with your question.

[Shlomo Rosenbaum, Managing Director at Stifel]

Hey, Christophe. A couple of quick questions. Just, maybe some of the growth in water and paper, particularly strong. Can you dissect how much would you say is coming from easier comps and how much is really an accelerated cadence of those businesses that we should be thinking about just on a more regular basis?

[Christophe Beck, Chairman and CEO at Ecolab]

First on water, it's been a steady business for many years because of all the right reasons. Water scarcity becomes a bigger issue, and by reducing the water usage, you reduce energy usage, you reduce your carbon footprint. It fits really well with the Net Zero idea. The water business, which is a very large business for our company, has been successful for years and will keep going well because customers need it even more because of these Net Zero approaches as such there. Now on paper, it's been an unbelievable year. In Q3, growing 19%.

[Christophe Beck, Chairman and CEO at Ecolab]

You have kind of a third of it is pricing, two-thirds is volume, some is comp, but a lot of new business as well has been generated in our paper division. It's not gonna stay at that high level as such because the comp are gonna normalize going forward. It's gonna remain a healthy business going forward with a very nice profitable margin as well.

[Shlomo Rosenbaum, Managing Director at Stifel]

Okay, great. What's the interest internally at Ecolab to pursue M&A within that pest business? There's been more consolidation outside, you know, with other players who bought a lot of small businesses. Is that something that you guys would be interested in going and doing more activity over there? Alternatively, if someone approached you about your business, would you be interested in doing a deal with someone else?

[Christophe Beck, Chairman and CEO at Ecolab]

Hard for me to comment on M&A, as you know, Shlomo. It's a great business so for us, so it's definitely not excluded from what we're looking at out there. We've done a lot of acquisitions. That's the way it's grown to a certain extent as well. We started with an acquisition in North Dakota, so a few decades ago as well. We know how to do it. It works really well. We do not exclude it. Is it number one priority in terms of M&A? No. I've always mentioned it's life science, water, healthcare, and digital are the big ones out there. Hey, Shlomo, we would not have strategy getting in the way of making money.

[Christophe Beck, Chairman and CEO at Ecolab]

If there's a good opportunity out there, we'll consider it as we've always done.

[Shlomo Rosenbaum, Managing Director at Stifel]

Okay, great. Thank you.

[Operator]

Mr. Monahan, there are no questions at this time. I would like to turn the floor back over to you for closing remarks.

[Mike Monahan, SVP of External Relations at Ecolab]

Thank you. That wraps up our third quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation, and best wishes for the rest of the day.

[Operator]

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

Participants

Executives

• Christophe Beck, Chairman and CEO
• Mike Monahan, SVP of External Relations

Analysts

• Christopher Parkinson, Managing Director and Senior Industrials Equity Research Analyst at Mizuho
• Dan Rizzo, VP and Research Analyst at Jefferies
• David Begleiter, Managing Director at Deutsche Bank
• Eric Petrie, Chemicals Analyst at Citigroup
• Gary Bisbee, Senior Equity Research Analyst and Managing Director at Bank of America
• John McNulty, Managing Director at BMO Capital Markets
• John Roberts, EVP at UBS
• Kevin McCarthy, Partner at Vertical Research Partners
• Manav Patnaik, Research Analyst at Barclays
• Rosemarie Morbelli, Portfolio Manager at Gabelli & Company
• Scott Schneeberger, Managing Director at Oppenheimer
• Shlomo Rosenbaum, Managing Director at Stifel
• Tim Mulrooney, Equity Research Analyst at William Blair
• Vincent Andrews, Managing Director at Morgan Stanley