Ecolab Inc (ECL) — Q2 2025 Earnings Call Transcript

Thank you. 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 states 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 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.

Thank you so much, Andy, and welcome to everyone joining us today. The Ecolab team delivered another very strong quarter, once again, very consistent with our guidance. Our team's relentless focus on execution and delivering exceptional value to customers enabled us to achieve double-digit earnings growth despite the unpredictable global operating environment. Organic sales continued to grow 3%, led by strong value pricing, solid momentum in our core business driven by our One Ecolab strategy that's working really well and fueled by breakthrough innovation as well as steady strong performance from our growth engines. This good momentum more than overcame and even end market demand, particularly in our paper and basic industries businesses, which represent only 15% of Ecolab store sales. In other words, the remaining 85% of our business grew organic sales 4% and operating income by 18%, reflecting our broad and resilient business portfolio. This is a major strength of Ecolab allowing us to deliver superior performance in good times and more challenging periods. Now let me spend a few minutes on our key growth drivers and talk about why I remain very confident about our future in '25, in '26 and beyond. First, on value pricing. It continued to build in the second quarter, increasing to 2%. This growth is supported by the increasing value that our technologies and services bring to customers as we deliver best-in-class business outcomes, operational performance and environmental impact. During the second quarter, we also began implementing our trade surcharge for all customers in the United States only. Given the dynamic international trade environment, the surcharge coupled with the expertise of our world-class supply chain team enables us to reliably supply our customers while delivering value that exceeds the total price increases. With this now in place, we expect our total pricing to strengthen closer to 3% in the third and the fourth quarter. Next, the growth in our core segments, like Institutional & Specialty and Global Water. While both continue to progress very well, in Institutional Specialty, we continue to drive robust share gains, allowing us to continue to outperform the industry while overcoming the headwind created by the strategic decision to exit noncore low-margin business. These exits, which are mostly in our hospitals and retail businesses, are causing a 1 to 2 percentage point drag on Institutional Specialty's second quarter growth, but they're also helping us to further enhance our focus on the most critical customers and at the same time, further improve our long-term margin profile. So all in all, a very good story. Global Water performance was led by food and beverage, which accelerated to 3% organic growth by executing very well on our One Ecolab growth strategy that provides customers with a comprehensive hygiene and water offering that no one else can truly provide. This strength more than offset the softer performance in more difficult end markets in paper and basic industries, as mentioned before. Excluding these businesses, Global Water sales growth accelerated to 4% and operating income grew double digits. Finally, Ecolab growth engines, which include Pest Elimination, Life Sciences, Global High-Tech and Ecolab Digital continued to perform exceptionally well. Collectively, these businesses make up nearly $3 billion of Ecolab's annual sales and grew double digits in the second quarter. Pest Elimination's organic sales growth accelerated to 6%, benefiting from our One Ecolab growth strategy and also the shift to our digital pest intelligence model. As expected, operating income margins increased sequentially to nearly 20%. And as we continue to deploy pest intelligence in the coming years by leveraging our major digital capabilities, we expect to generate steady, strong sales growth and very attractive operating income margin expansion. Life Sciences grew mid-single digits, led by strong double-digit growth in biopharma as well as in core pharma and personal care, while performance in water purification was partially impacted by shorter-term limitations in production as we are at full capacity. Also, operating income grew significantly benefiting from the strong growth in our high-margin biopharma business. We expect reported operating income margins to stay in the mid-teens as we invest further to fuel this long-term high-growth business with operating income margin potential of 30%. Also, our Global High-Tech business continues to grow rapidly with sales up over 30% and operating income margin exceeding 20%. We're just at the beginning of this incredible growth story, but this is one we will own by leveraging our vast expertise in cooling for data centers and water circularity solutions for microelectronics production. And finally, Ecolab Digital kept accelerating sales growth to nearly 30% in the second quarter, reaching an annualized run rate of $380 million, driven by rapid growth in subscription revenue and digital hardware. This exceptional performance, combined with value price and share gains across the businesses drove a 170 basis points increase in Ecolab's second quarter operating income margin. While commodity costs are anticipated to keep increasing by low to mid-single digits in the second half of the year and in 2026, we expect our operating income margin to continue to expand at steady levels due to growth in high-margin businesses, value price, share gains and productivity improvements. In total, we continue to expect our full year 2025 operating income margin to reach a solid 18%, on our path to deliver a 20% operating income margin by 2027. And as mentioned, we will not stop there. Looking ahead, most business fundamentals seem to be trending up, which provides me with the confidence to deliver 12% to 15% adjusted EPS growth for the quarters to come in '25 and into '26 as we also keep investing in our growth engines. Our experience in navigating past macro challenges has only strengthened our capabilities and agility, with our diversified portfolio, record innovation pipeline, strong growth engines, and focused execution with plenty of options and levers to deliver on our commitments in almost any environment. Our unique ability to provide innovative solutions that drive best-in-class outcomes, enhance operational performance and conserve vital resources like water and energy for all our customers is crucial, or more crucial than ever. With strong and resilient free cash flow, an extremely strong balance sheet and a super low leverage ratio of 1.7, we're very well positioned to capitalize on both organic and inorganic growth opportunities. These strong foundations enhance our ability to create significant value for our customers and drive attractive returns to our shareholders. Therefore, we remain very confident in our ability to deliver sustained, strong performance in '25 and beyond. So thanks again for your continued trust and your investment in Ecolab. I look forward to your questions.

Thanks, Christophe. That concludes our formal remarks. One final reminder before we begin Q&A. We'll be hosting our Investor Day on September 4 in Minnesota, where Ecolab's senior leadership team will provide an in-depth review of the company's strategy to drive strong growth and attractive margin expansion. This event will also include interactive sessions showcasing Ecolab's latest breakthrough innovation. Please contact me if you are interested in joining us. With that, operator, would you please begin the question-and-answer period.

For my question, I wanted to ask if there were expectations that you might raise your guidance or the lower end of it slightly this quarter. While the second quarter met expectations, I think some people are hoping for a bit more for the second half of the year. Could you clarify the factors at play here? Is there some conservatism being considered, or is there something else I might be missing?

Thank you, Tim. It's actually a combination of both conservatism and at the same time, investing further in our growth businesses. 13% growth on earnings for the second quarter, guiding this 12% to 15% for the second half and beyond. For me, this is the commitment I've made to all of you, and this is where I want to make sure that at least I deliver that. Actually, well, I really like where we are right now. So we have good momentum with, as mentioned, 85% of our business growing 4% and growth engines, the one I mentioned before that represent close to $3 billion in sales, but they're growing double digit. So our investments in growth are really working. Second, the macro trends around water for AI infrastructure, purification for Life Sciences and productivity for hospitality and Pest Intelligence, while they're all trending in our favor, this is a good thing. And our business fundamentals of new business, innovation, value pricing, productivity, they're all trending in a positive direction. So I'm with you. I feel good about where we are, where we're going about the second half and for 2026 and beyond. But as we know, the world is a bit of a complicated place and we honestly always build some room for the unexpected. And the last few years, while we have plenty of this and some could call it conservatism. For me, it is making sure I can deliver what we've promised. And secondly, we keep investing more in our growth engines to fuel this long-term momentum, like science, in data centers, in fabs, in pest intelligence, in Ecolab Digital. And ultimately, this we keep paying dividends in the long run for all of us. So bottom line, I think we're in a very good place. And any over delivery that we will get in the quarters to come and years to come will be shared between returns for incremental returns for investors and incremental investments in our growth business. So all in all, I think it's a win-win for the company and for investors as well at the same time, for me, as I mentioned, this 12% to 15% is not an ambition. It's a commitment and anything that comes above will be a combination of returns and investments in our growth businesses.

Christophe, I just wanted to touch on pricing. I understand from a volume perspective, obviously, as you mentioned, the world is in an uncertain place, etc. Just can you help us dig through what you're hearing, what you're seeing on the pricing front? I think the 2% was supposed to be 2.5% or maybe a bit higher. If you could just talk about what we should expect in the second half with and without the surcharge pricing that you have coming in?

Yes. Thank you, Manav. I like a lot where we are on pricing. And keeping in mind it's value pricing. We've made that commitment to customers as well that we will always deliver more value, which means cost savings in the operations and the incremental price they're for us. It's kind of a value share that's the important component of how we think about pricing in our company. So 2% in Q1, 2% in Q2, starting the U.S. trade surcharge as well in the second quarter. So far, so good, but it's always a start during the quarter, you announced it. So for Q3, Q4, I expect pricing to move closer to 3%. So I don't know exactly where we're going to land in Q3. But in Q4, it's going to be 3%, hopefully, will be 3% or close to 3% as well in Q3, but all trending up. And again, backed by the value delivery for our customers. And what's most important is that the retention of our customers, which is something that we look at very closely is getting stronger as well at the same time. And as you see in the volumes, positive as well, especially strong in our growth businesses. So all in all, it's working well, and I see value price as a good revenue stream at 100% margin for us and in ways that are driving savings in our customers' operations as well at the same time. So it's working really well.

So just wanted to focus on the Pest Elimination business, where we saw an improvement. Can you talk about some of the efforts around pest intelligence, how those rollouts are coming together? And how should we think about the puts and takes for growth going forward?

Thank you, Ashish. We are very enthusiastic about the Pest Elimination business, which is evolving into pest intelligence over the coming years. The transition won’t take long, as we shift from our current model of having personnel visit various customer locations to a remote system that operates 24/7. This approach allows our team to focus on adding value rather than just checking devices, reducing unnecessary efforts. We are on an exciting journey, and we have significant advantages at Ecolab, including our advanced digital capabilities and sensing technology, which we can leverage in our Pest Elimination business. Recently, we completed a pilot with a major U.S. retailer to test our technology and business model. Currently, the pest-free rate in the industry is 92%, while Ecolab's average is 95%. However, our pilot is achieving a rate of 98%, trending towards 99%. We know we can’t achieve 100% due to natural factors, but 99% seems feasible. This is a promising outcome, and our customers are supportive of the financial model. We are already moving to engage with a second retailer, with a third lined up for the upcoming months, and we plan to expand across all markets shortly. This entire business is set to transform into a fully pest intelligence-based model in the next few years, leading to increased growth, improved margins, and importantly, ensuring a 99% pest-free environment for our customers. It’s a very positive development.

Can you help us to think about the delivered product cost that you saw in this quarter and how you're thinking about that as you go into the second half? It seems like there's kind of still a lot of moving parts around tariffs and headwinds around that, raw materials, kind of some of them fading, some of them pushing higher. So can you help us think about those trends?

John, a lot of moving pieces to say the least. We've been used to that. Let me ask Scott just to start with the answer here.

Yes, absolutely, John. Yes, on delivered product cost, so similar to Q1, Q2 commodities, so the market, if you will, was up low single digits, which includes the impact of tariffs and tariff-related inflation, which we're seeing, but the net DPC was slightly favorable as we've gotten efficiencies from our great supply chain team. So we expect the market, the commodity inflation, to be up that low single to mid-single digits in the quarters to come, ultimately, depending on the tariff impact. But we expect to continue to do better than this with the impact from our supply chain team, which we're seeing in the results of our gross margins being up 100 basis points in Q2.

So the combination of the supply chain doing an amazing job to get a net DPC that's favorable and value price that's trending positively as well is obviously driving a very positive equation for our margins, which is one of the reasons why our gross margins went up 100 basis points again in Q2.

Christophe, on U.S. surcharge, do you still expect to realize roughly half of what you announced? And are you seeing competitors support for this surcharge? And lastly, why not anything on the international side in terms of a surcharge?

So a few questions in there, David. The first on competitors. They've announced a trade surcharge. I'm not in their books, obviously, so I don't exactly know what they're doing. The good thing is that we're gaining share against them, which is a good place to be. So good that they're all participating and that we're winning as well at the same time. The second, in terms of delivery, it's an imperfect science, as we know, but generally working, as you've heard from Scott, when we look at tariff increase of prices by local manufacturing concentration, our optimization in supply chain plus the trade surcharge, it's a net positive, and you see it in our margins ultimately. So the mechanics work really well for us and for our customers, which is exactly where we want to be. And the third part of your question, international. We have all it takes to get it done. It's just that today, as you know, those trade deals with the economies around the world are all unilateral. So it's a tariff you get when you import or you export to the U.S., not when the U.S. is exporting to other markets; at least we haven't seen those. The moment we see those, if there are reciprocal actions from any market out there, we have the mechanics. We know how to make it work. We've used it with the energy surcharge in 2022. We can use it. So far, we don't have any reasons to do it. So we will not obviously use it as long as the tariffs remain as they are to export to other countries.

Christophe, despite a pretty sluggish macro environment, your margins in institutional and Life Sciences seem to be moving in the right direction. And on one hand, you've been talking about price, presumably productivity and portfolio rationalizations on the positives versus presumably a still pretty sluggish macro and perhaps a little bit of gross spend on the opposite side of it. But just in the context of the macro we're in, what do 2Q results tell you about your longer-term opportunities by segment?

Great question, Chris. What it's telling me is that it's working. Because I&S has reached the highest level of margin they've never had in their history. This team is doing unbelievable work by really focusing on what customers need the most. It's labor automation, labor optimization, whatever the words are, they have a hard time to get talent, and the talent they're getting is at a higher cost, which was a good thing for the general environment but not so much for the profitability of our customers. So when I look at automation solutions for our I&S customers, it works for them. It helps them reduce their costs in dramatic ways, which means that we can get some of that value share in our value price. So that's good for us and good for them. At the same time, we're also leveraging technology within I&S, really pleased with the way I&S is embracing digital technology, One Ecolab platform that we've developed for the whole company, for the whole I&S as well at the same time. So we get an improvement as well at the same time from an operating performance perspective, which is really good. And the third thing is that because of that, better service, better outcome, better productivity for our customers, we gain share as well at the same time. And you see the growth of I&S is really good. It's even been impacted by 1 to 2 points by those exits, as I mentioned before, which were private label businesses, which didn't have much to do with our service business, by the way, but we're gaining share. And that's showing that it's working. Customers like it. So the combination of all three; gaining share, driving value for our customers and driving operational performance within I&S will net to the highest margin in our history in I&S, and it's going to continue on that good trajectory for the quarters and years to come.

Could you elaborate on what you mentioned in your prepared remarks about being at maximum capacity in certain areas of the Water business? Additionally, it seems that customer trials in pest control are progressing very well. I'm interested in the timeline and pace of implementing this new technology, your improved solution, and whether there are any capacity constraints you need to address.

Yes. So two different businesses. Obviously, it's our pest intelligence with the better mousetraps, which are truly better mousetraps. It feels easier to do than it truly is to get that working really, really well, millions of times around the world where we operate with Pest Elimination and in the future, so pest intelligence. We wanted to make sure it was working before we go too far getting ahead of our skis and not delivering the value to our customers would not be the right thing to do. Obviously, having one of those great retail partners, which is a reference point in the U.S., was exactly what we wanted to do, and it worked. Now we're getting a second, and the third one is lined up as well. I think it's going to take a few years. It's going to take less than 5 years, hopefully much less, but let's see, to shift the whole business towards pest intelligence. We have a great team with great leadership and customers that really love what's being done. At the same time, we have digital capabilities that none of our competitors have. So that should be all positive, obviously, for us. In Life Science, you're right, Vince. So we got some capacity limitations in our water business within Life Science, in water purification, the Life Science business, not for the pharma business directly. Pharma, biopharma, as mentioned, is growing double digits, very strong, very good, really pleased to see that all the work that we've done over the past 2, 3 years since we acquired Purolite, ultimately, it's paying off and really looking at some really good momentum and, most importantly, great acceptance by our customers. And in the second quarter, we had maintenance that were planned in one of our plants in Europe that limited how much we could produce there, and that has a slight impact on our production over there. That plant, that's okay. We need to live with it. That's not much to do with our profitability obviously. So kind of business as usual.

Maybe just a related follow-up there on Water. I think the operating income growth was rather modest relative to solid pricing growth and good underlying growth there. I think you cited supply chain costs and unfavorable mix. But I think our assumption was some of these faster-growing markets have better mix. So what was the source of that unfavorable mix?

Yes, happy to do it, Patrick. As Christophe noted in his opening, basic and paper have been a drag, and that Water OI growth of 6% was all due to basic and paper. If you look at the Water OI growth, excluding both basic and paper, the sales were up 4%, and the OI was up strong double digits.

If you don't mind, I'm going to ask a little bit more of a two-parter. First one is just on the organic growth if we're kind of bouncing around at 3% and volume is only kind of 1% here, do you still have the same level of confidence on that operating margin target, especially if we don't start to see a material improvement in the volume side? And then just wanted to touch on what you said on pest in terms of morphing the model because we've had a couple of quarters of growth that were lower than what we're used to seeing in that business. Is part of the shift in the model giving you a near-term headwind to revenue growth in that business?

Thank you, Shlomo. Yes, two very different questions. So on Pest Elimination, the short answer is yes. The shift towards pest intelligence is not an obvious shift, it's a pretty significant shift within our organization. It's new technology. It's a new route model. It's a new financial model. It's a complicated piece, if I may say so to make it work really well. And on top of it, we had a few incidents that we had to deal with, unfortunately, as well caring about our team. That's so important for us in the company. So it was kind of behind us. Now we keep investing in pest intelligence because it's going to help us really lead that transformation in that industry in the U.S. and around the world, not just in terms of amount of devices but in terms of type of technology and business model as well at the same time. So it requires some investments, financial investments, but resources as well at the same time, which are people obviously doing that work. Generally, we feel good with the trajectory we have on the top line in terms of model as well. So the 20% plus is going to just strengthen with that shift in model in pest intelligence. So generally, a very good story. Those transformations are never obvious, and it's not a straight line to heaven either, but we have a great leadership team, great team executing very well. And as mentioned before, customers are very pleased with how it's working because at the end of the day, it's aiming for the 99% pest-free environment that matters. Now to the first part of your question, my confidence to get the 20% by '27 just keeps getting stronger. If we look at the second quarter well, with top line growth of 3%, being able to deliver 13% earnings growth and operating income margin up 170 basis points. Obviously, it's kind of a demonstration of what accelerated growth could mean as well for the delivery of the company. And as mentioned, we have two businesses and there will always be a few businesses that are not exactly in a great place. That's the strength of the portfolio we have as a company here. So paper and basic industries, well, 85% of the company is growing 4% and 20% of our growth engines are growing double digits as well at the same time, and that's where we invest. So generally, the mix of growth is going to turn positive, and that's going to help us get closer to the 20% quicker as well at the same time. So I can't judge what's going to happen in the outside environment. But generally, I feel really good about 20% by '27.

With the balance sheet now in great shape, how would you characterize the pipeline for inorganic growth? It's been a while since the Purolite deal?

It's been a while since the end of '21 we did Purolite. We did a few smaller acquisitions in the meantime, which is the bread and butter of our M&A engine, by the way. And sometimes we have a few bigger ones. And you're right. We have a great cash flow, great cash flow conversion, very low leverage ratio that is going to get lower, obviously, as time passes by. It's putting us in a great position to invest where it makes more sense. And John, we're going to keep investing as we've always done. It's first in dividends, it's in our business, and we have plenty of opportunities. We talked about innovation on this call. It's on our customers' technology as well in dispensing, in dish machines, in equipment and so on, as we've always done. And then there is the M&A. I really like the pipeline that we have, very focused on the three areas that have been priorities for me: Water and especially on the High-Tech side, data centers and microelectronics, so fabs, in other words, in Life Science and in digital technology. So really, I like the pipeline we have, the capabilities we have at the same time, but we will always remain disciplined as well in terms of how we deploy our capital. So if we find the right things, and as mentioned, there are a lot of right good things out there for us, we will move, and we'll let you know, obviously. And as a last priority, will always be buybacks as we've done in the past 2 years and as we're doing as well in '25 at the same time. So don't think we could be in a better position right now. So we have a great machine generating a lot of cash, a fortress balance sheet, great opportunities in front of us, and priorities that haven't changed for a very long time.

In the Water business, the organic change was 2%, and I think your Water business grew, maybe volumes grew 1%. Please correct me if I'm wrong. And your overall price for the company was 2%, but it seems that it was lower in Water. So is the challenge for the second half to get better pricing in the Water division? And do you need it in paper and in heavy industry where you're contracting a little bit? Is that the challenge for the second half in pricing?

No, I don't think so. Our Water business has always been pretty strong at driving value price backed by total value delivered; they've invented that concept a long time ago. So they know how to do it. They've been good at delivering it. At the same time, we make absolutely sure that we get the value price when we truly get it as well, so the total value delivery, the cost savings within our customer operations. So we're not disclosing by segment, as you know, so price and volume. But you're more right than not with your assumption on Water, which makes me feel good actually. And as mentioned before, the Water organic growth excluding paper and basic industries would be 4%. So it's a very good story. As Scott mentioned as well, and the operating income would be up in the mid-teens as well at the same time. So a really good story.

I guess I wanted to ask about free cash flow and just try to understand a little bit more about what's happening here. As I look at it on a year-over-year basis and normalize it for days, like the inventory up just a smidge, receivables are up more than a smidge and payable days are actually extended as well, yet year-over-year, the cash flow is down. And year-to-date, you're about 65% of your adjusted net income. I know you always target 95%. And so obviously, the second half is going to have to ramp if this year is going to be a 95% year. So I guess, Scott, maybe the question is, do you still expect it to be a 95% year? And maybe what happened in the first half? Or did you see anything happen that's unusual in the first half that we should know about that maybe has you at or slightly below plan for the year?

Thank you, Andy. I will pass this to Scott who is more of an expert.

Andy, regarding cash flow, I anticipate that our free cash flow conversion for the year will be approximately 90%, which aligns with our historical trend. It's important to note that in the first quarter, we faced an unfavorable year-over-year comparison. However, in the second quarter, our free cash flows increased by 17% year-over-year, largely due to strong earnings growth. On year-to-date performance, we're down because of the first quarter's results and a substantial comparison to last year's performance, influenced by the timing of cash payments. The expected 90% for the full year, which may approach 95%, is supported by robust earnings growth. Additionally, CapEx is anticipated to rise about 7% this year, contributing to the 90% mark. Overall, I am confident in our free cash flow trajectory, though the first quarter has resulted in a somewhat unusual year-to-date figure.

Margins in Life Sciences were pretty strong in the quarter. Can we just dive into that a little bit and maybe what's driving the expected quarter-over-quarter drop back towards the mid-teens from the nearly 20% on the quarter itself?

It's two things, Matt. When considering Life Sciences, the margin growth in Q2 was primarily due to strong performance in pharma and biopharma, which also have the highest margins. This resulted in a very favorable margin mix for the second quarter. Interestingly, this business is somewhat dependent on delivery timings because the price per pound is significant. As such, margins may shift between quarters based on when deliveries occur, although there is no year-over-year cyclicality; the business remains steady. The key takeaway is that, as I've mentioned before, we continue to invest in this business. We aim to be a small, agile player among the three major companies in this industry globally. Therefore, we maintain our investment, which means we have reported operating income margins in the mid-teens, but the true underlying margins are closer to the mid-20s. This involves investing in capabilities, innovation, talent, R&D, and manufacturing capacity to achieve the leadership position we aspire to. While the trajectory won't be linear, we expect strong performance ahead. I've always been optimistic about this business, and the results this year have been impressive, with expectations for continued improvement. It's a positive story that is evolving, and I want to ensure we keep investing, even though this may impact our operating income margins for some time.

Just looking at the balance sheet and the $1.9 billion in cash on the balance sheet is kind of an elevated number. I know that you have about $600 million worth of notes that are coming due. But any other explanation of why that cash balance is getting so high? And kind of should we expect that to remain high adjusted for that $600 million of notes payable?

Good to hear you, Mike. I'll pass it to Scott, obviously.

Our priorities regarding capital allocation remain unchanged. As previously mentioned, they focus on dividends, investing in the business, and considering buybacks with any remaining funds. Our balance sheet is in great shape with leverage down to 1.7, while our long-term target is around 2x, placing us in a very strong position. We had approximately $1.9 billion at the end of Q2, which included $500 million from a bond offering in June, ahead of the $525 million euro maturity we paid off in July. The bond offering timing coincided with this maturity, but even after these transactions, our cash remains high. The strength of our balance sheet and the optionality it provides us to create value, particularly in the current environment, is notable. We plan to invest in the business, enhancing capabilities, capacity, firepower, and innovation. Simultaneously, we have a solid M&A pipeline that we will approach with both opportunism and discipline. We aim to enhance value by investing in key growth areas such as Water, GHT, Life Sciences, and Digital while ensuring we achieve strong returns. We are pleased with our current position.

So one question about the gross investments that you're doing on the three growth areas, for the three priority areas. How do the IRRs and cash paybacks or payback periods compare with the more traditional investments that Ecolab would do in the institutional and in the Nalco business in the '90s, 2000, and 2010? Can you just give a sense whether there's any material difference in the economics that you're seeing?

I don't have a precise answer to that, nor does Scott. However, we are focused on four main businesses, and potentially five when including Life Sciences, Global High-Tech with its data centers and microelectronics, pest intelligence, and Ecolab Digital. All of these segments are experiencing rapid growth, nearing $3 billion, with double-digit increases and margins closer to 30%. That’s a strong narrative. With margins exceeding the average, and given our investment strategy of growing as a business, we expect our returns to be above average. This approach leads me to continue investing in these thriving sectors. In biopharma, we believe this sector is the future of pharmaceuticals. Regarding data centers, we are growing at 30% and possess unique technology that optimizes power usage for cooling, which accounts for 40% of total power consumption. In microelectronics, one large manufacturer in Asia uses as much water annually as one of the biggest food companies worldwide, highlighting the significance of water solutions for that field. Our pest intelligence initiatives and Ecolab Digital, led by David Bingenheimer, are also excelling, with the latter becoming a $380 million annualized business, growing at 30% and maintaining high margins. All these sectors show exceptional promise moving forward, and I believe they will yield returns above average, making them the right areas for investment.

I was wondering if you could size how much you think you're reinvesting in the business today versus what you thought you would do in 2025, 6 months ago? And if you could just help us understand kind of where that is going? I guess, in the context that your SG&A is actually down year-over-year, where is that going? And kind of how do you think about the timeline of that payback, somewhat similar to Laurence's question?

It's challenging to provide a definitive answer. However, as Scott mentioned, we have invested over 1 percentage point in CapEx this year, which is proving effective, so we may continue this approach. In terms of SG&A, we might see around 0.5 points, depending on how you define it clearly. Our focus remains on three areas: enhancing our ability to serve customers, advancing digital technologies, and unifying our operations as One Ecolab. This is where and how we are prioritizing our investments to strengthen our businesses. I hope this gives you some insight into our thinking. Additionally, like the previous Life Science example, I want to understand the margins before and after investing to gauge the long-term growth potential in Life Sciences, which currently has mid-teens reported and mid-20s underlying margins. As the business expands, those figures are expected to improve. We are focused and measured in our approach, with clear objectives in mind.

This one may piggyback off the last question. But I'm curious if you could maybe give some examples of the cost savings and efficiencies that you've been able to find as you've implemented One Ecolab and some of your other initiatives?

That's a great question. So Scott, who has done an amazing job in One Ecolab, especially the one company part, which is really aligning the whole company behind our customers by leveraging technology, Gen AI in dramatic ways. Probably one of the company's most advanced in that work that's what we hear out there. So Scott, why don't you share a little bit what you did and what you are doing?

Yes, absolutely. Jason, as you said, SG&A leverage is very good. We drove 50 basis points in Q2, expect to drive that 20 basis points we talked about earlier in the year as we continue to invest in the business. The one thing I do want to note, and I going to take the opportunity, not every quarter will be created equal. We expect Q3 SG&A to be up a couple of points sequentially, Q2 to Q3, in part due to FX, as you look at FX last year was a favorable item in Q3, it will be unfavorable this year. But to get to the core of your question on the savings, what's driving that leverage. It's One Ecolab, which is allowing us to reinvest in the business. As we've talked about, Ecolab is a growth program. But at the same time, there is productivity that we're getting out of it that we're focused on driving this growth with our cross-sell opportunity, which is a $55 billion market. But at the same time, we're driving great efficiencies as we do that. We're ahead of schedule on $140 million of savings. I would say we'll be a little bit north of 50% of that realized in 2025. Of course, the costs come a little bit ahead. And driving those savings is how we use our five global centers of excellence, right, and create some scalable processes in leveraging that Agentic AI that Christophe talked about automating and augmenting people's work, right, which improves the experience of both our customers as well as our associates. So I expect, as I said, the SG&A leverage to be about 20 to 30 basis points in 2025 as we continue to reinvest in the business. But beyond '25, that platform from One Ecolab and the digital platform that we're building there is going to help us generate leverage above our historical average, which has been about 20 to 30 basis points.

Christophe, I appreciate your bifurcation into the 85% that's doing well and the 15% where basic industries are more challenging. I'm curious as to whether the relative weakness in those basic industry markets may necessitate any new or incremental actions by Ecolab? I'm thinking about portfolio composition, resource allocation, productivity initiatives and the like. Or is it the case that, hey, these are really just cyclical end markets and they'll come back before too long, and it would be a mistake to go down those paths. Maybe a different way to ask the question is, is it purely cyclical? Or do you see any structural elements that may argue for pulling some levers?

No, I don't see any structural issue. In the past, we've successfully addressed any issues, whether on our own or by collaborating with others, as we did with our surgical business in 2024. This isn't the case for the two businesses in question. If I take a moment to reflect, one of Ecolab's major strengths is our broad market presence and geographical coverage. Even when some areas face challenges, most of our operations are performing well, with some sectors, like our growth engines, doing exceptionally well. It’s unrealistic to expect all our businesses and regions to be thriving simultaneously, but I view this diversity as a strength. Regarding the two businesses, particularly in basic industries, the power sector has historically been stagnant, but we hold a significant market share and serve nearly all nuclear plants. However, this sector is poised for substantial growth due to advancements in AI infrastructure, data centers, and microelectronics that demand more power. While there's a ramp-up period, what I once considered a limited future for this business now seems promising. Our capabilities, some of which the industry has lost, particularly in the nuclear sector, will benefit us moving forward. In our paper business, we've transitioned away from graphics paper—once half of our operations—to less than 20% today, reflecting our goal of becoming a paperless company focusing on digital solutions, which may soon render that sector obsolete. Hence, we're pivoting towards consumer products like tissues, towels, and specialized packaging, and I’m pleased with the innovations we're pursuing in this area, supported by our strong R&D efforts. In summary, these two businesses are not candidates for strategic changes; instead, we intend to enhance them. We know how to achieve that, and overall, I feel positive about the situation.

I have a question for both of you. Scott, first, just have you had time to consider the One Big Beautiful Bill Act, the impact most likely on free cash flow? How you're thinking about that, any comprehensive quantification? And then Christophe, a lot of discussion, particularly about some of the basic industry paper software areas that seem, you've mentioned earlier, impacted by tariffs. Could you just kind of address a high level how you're thinking about the tariffs right now, how it could affect in the back half? I know it's very uncertain, so you can't really give one scenario. But what you're thinking about what's on your mind as far as what you may be experiencing in the back half for the broader business?

Scott, I'll pass it first to the other Scott to talk about the Big Beautiful Bill. And then I will cover the other question.

So net overall, it's still early days, but our expectation is the Big Beautiful Bill is going to be a net positive for the company. As you think about it, encouraging investment in the U.S., which is our strongest market, growing really well with good margins. At least to the tax side of it, a bit early to quantify any impact, but I would just tell you where I'm sitting here today; I don't expect it to have a material impact on our tax rate, frankly. But again, that overall is expected to be overall favorable to the business. On the tax side, if anything, there will be some short-term cash tax timing but not an overall effect on the rate.

For the second part of your question, Scott, the tariffs for the second half are designed to have a greater impact over time. I remain confident in our preparedness and the mechanics involved. There are four key components to consider. First, the tariffs affect the cost of imports, but since 92% of what we sell is produced locally, which has always been our model, we don't rely heavily on imports. Second, local manufacturers will face higher prices as onshoring increases, which is the intended effect of the tariffs. We address this through effective supply chain efforts, and I'm grateful for my team's work in that area. Additionally, we have a trade surcharge. When all these factors are combined, they contribute positively in practice for Q2. Looking ahead to the second half of the year, I feel optimistic. This is one reason our prices are set to rise. As previously mentioned, I am confident about achieving a 12% to 15% growth in the coming quarters and into 2026, given the favorable momentum we have. Currently, 85% of our business is at 4% and producing double-digit operating income, placing us in a solid position. The macro environment is beneficial for our sectors, including water infrastructure, life sciences for biotech, productivity in hospitality, and pest intelligence. Our fundamentals as a company are robust. I want to reiterate my positive sentiment about our trajectory and our performance expectations for the next few quarters, targeting 12% to 15% growth. Any performance above that will be shared with investors through returns and reinvestments in future growth, with complete transparency as we progress. Overall, I'm pleased with where we are headed for the second half of 2026. Thank you all, and with that, Andy?

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. Thanks for your time and your participation, and hope everyone has a great rest of the day.