Ecolab (NYSE:ECL) held its first-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.
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The full earnings call is available at https://events.q4inc.com/attendee/688092333
Summary
Ecolab reported strong financial performance with a 13% growth in adjusted value GDPs and 4% organic sales growth, driven by a 3% increase in value pricing and 1% volume growth.
Strategic initiatives included significant growth in high-tech and digital sectors, exceeding 20% growth, and continued expansion in life sciences, achieving 11% growth.
The company is implementing an energy surcharge to counteract rising commodity costs, expecting to stabilize gross margins by the second half of the year.
Ecolab's growth engines, including high-tech and life sciences, are accelerating, contributing to a shift towards higher-margin markets.
Management expressed confidence in delivering a 12-15% EPS growth for the year and achieving a 20% operating income margin target by 2027.
Full Transcript
OPERATOR
Thank you everyone for joining the Ecolabs first quarter 2026 earnings release call. This time all participants will be in listen only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star zero from your telephone keypad. As a reminder, today's conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Vice President Investor Relations. Thank you Andy. You may now begin.
Andy Hedberg (Vice President Investor Relations)
Thank you. Hello everyone and welcome to Ecolab's first quarter conference call. With me today are Christoph 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 [email protected]/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 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 Christoph Beck for his comments. Thank you so much Andy and welcome to everyone joining us today we had a great quarter with accelerating momentum across our portfolio and I know oil prices, energy and supply are top of mind for most. It's not for me. In 2022 commodities cost was up 50% and our margins per cycle went further up. Today Commodities cost is up 9% and we've all the tools to address this within one quarter done the right way for our customers. As I sit here today I feel very good about the year and how we're managing a complex environment and I feel even better about where we're going next. What matters most to me today is to keep the organization focused on growth, to supply our customers seamlessly anywhere around the world, and to support our teams, especially those operating in the Middle east in a complex environment. Our teams are staying very close to customers and supporting their operations without any single disruption. Because what we do is almost always mission critical to them. And when something is mission critical to our customers, it becomes mission critical to us too. That means supplying reliably, solving problems quickly and delivering the outcomes they count on. And it's working. We would never ever let the customer down. That commitment is what drives the consistency and the strength you see in our results. Now turning to the first quarter we delivered once again a very strong quarter with adjusted value GDP's growth of 13% right in the middle of our range. Momentum strengthened across the business as organic sales grew 4% driven by continued strong value pricing of 3% and volume growth that accelerated to 1%. We expanded operating income margins reflecting the disciplined execution across our global portfolio and the strength of our one Ecolab approach which brings together service, expertise and breakthrough technology at scale. Momentum continued to strengthen across the portfolio led by our growth engines which by the way have close to no exposure to energy costs. Global high tech and digital grew more than 20% driven by strong demand tied to digital adoption and the ongoing AI buildup. Life sciences accelerated to 11% growth led by bioprocessing with sales more than doubled. We have been investing in talent, capabilities, capacity and breakthrough innovation in this high growth high margin business for quite some time and today these efforts are clearly paying off and we're just getting started. We expect Life Sciences growth to continue its double digit momentum and operating income margins to expand toward our 30% target over the next few years. And finally, Pest Elimination delivered a strong quarter with 7% growth reflecting strong share gains from our 1e Colab growth initiative and naturally our new Pest intelligence offering. Our core portfolio also performed very well. Institutional strengthened with solid growth across restaurant and lodging customers more than offsetting somewhat softer market trends. Specialty gained share with 9% growth driven by innovation that helps customers optimize costs. Food and Beverage outperformed its end market again growing 5% supported by strong execution of our One Ecolab approach and light Water delivered steady growth too. We'll see progress in smaller parts of the portfolio that have been a bit under pressure. Collectively, the performance in paper and heavy water stabilized as we supported them with new business and innovation. Overall, our growth engines are accelerating, our core performance is strong and business that had been under pressure are turning the corner together. This continues to shift our portfolio towards higher margin, higher growth, end markets well aligned with our long term strategy. We also delivered solid operating income margin expansion this quarter. Underlying gross margin was steady as strong value pricing offset commodity cost inflation. Reported gross margin was slightly lower due to a short term impact from recent M and A and higher commodity cost inflation. However, the M and A impact was favorable to our SGNA ratio and as a result largely neutral to our OI margin. Underlying SG and A productivity improved meaningfully as we continue to scale our unique digital and agency capabilities resulting in strong SGA leverage year over year. As a result, organic operating income margins extended by 70 basis points to 16.8%. We expect OI margin expansion to improve in the second half of the year as pricing accelerates and we remain very confident in delivering on our 20% OI margin target by 27. Looking ahead the operating environment remains dynamic, but we are ready. We remain focused on growth opportunities while we keep managing a complex global environment. The conflict in the Middle east is one example. It has driven sharply higher global energy costs, creating additional pressure across supply chains and in moments like this, customers turn to us as their partner of choice to ensure secure supply, exceptional service and solutions that help reduce operating costs. We take decisive actions to absorb cost pressures wherever we can. However, the magnitude of energy cost increases requires additional action to ensure reliable supply, which is why we quickly implemented an energy surcharge. This is an approach reviewed successfully before focused on delivering incremental total value for customers that exceed the total price increase. We know it works for our customers and we know it works for us. As a result, the second quarter will be a short transition period. Commodity costs are expected to increase high single digits starting in the second quarter and we expect those costs to remain high through the end of the year. Surcharge benefits will build through the quarter following implementation on April 1st. With this, higher commodity cost will impact second quarter EPS growth by a few percentage points. However, underlying performance remains on track and within the targeted 12 to 15% range. Importantly, we expect to already fully offset the dollar impact from higher commodity costs as we exit the second quarter. As pricing continues to accelerate and volumes continue to grow, we expect organic sales to increase 6 to 7% in second half of the year, helping to stabilize our gross margin during that period and that's net of OVIVO ex. OVIVO gross margins would be up 70 to 80 basis points in the second half. In other words, we will be fully offsetting the significant rise in commodity cost and its impact on earnings and margins in just a few quarters. As a result, we expect EPS growth to strengthen in Q3 and Q4, resulting in unchanged full year expectations. We therefore continue to anticipate adjusted diluted eps growth of 12 to 15% this year, excluding short term impact from the pending Cool IT acquisition. As discussed earlier, Cool IT financing and non cash amortization are expected to have a short term impact on adjusted EPS in the second half of the year following the close. The impact is expected to reduce quality eps by approximately $0.20. Importantly, underlying EPS growth remains unchanged beyond this short term impact. This year we expect EPS growth, including Cool it to accelerate back into the 12 to 15% range as contributions from these high growth high margin acquisition accelerate and amortization from the Natco acquisition rolls off. What's even better, the impact of our growth engines on Ecolab's global performance is accelerating as we scale down. This is especially true for global high tech where AI is driving significant new demand for circular water management and high performance cooling. By bringing Cool it and Ovivo together with our global high tech water business, we're building a one and a half billion dollar powerhouse that will help fuel Ecolab's next phase of growth and margin expansion. As AI accelerates the build out of global digital infrastructure, customers are prioritizing uptime cooling performance and reliable water management while driving massive increases in compute power. With lower energy use and net near zero water footprint, our circular water solutions help deliver exactly that. From ultra pure water to produce the Most advanced chips to 3D trays are connected water to support power generation and now directive cheap cooling to cool the chips. Ovivo expands our ultra pure water and end to end microelectronics offering in a business expected to grow at mid teens rate this year supported by a strong pipeline tied to FAB expansions and increasing water circularity needs. Our pending acquisition of Cool it builds on this momentum, adding a scaled direct liquid cooling platform and positioning global hitech with an integrated service LED cooling solution for high density AI data centers. And here's more good news cool ideas shared with us that they are off to a very strong start in 2026 with first quarter sales growing well ahead of the 30% plus we discussed on the acquisition call as demand for their leading liquid cooling technologies continues to rapidly accelerate. Together these two businesses have the potential to add a couple points of high margin organic sales growth to Ecolab's total growth as they scale and capture more of these huge and fast growing high tech market. In closing, we delivered a strong quarter with accelerating top line momentum, continued margin expansion and double E GDPs growth in a complex environment. Our near term outlook is strong and consistent. Growth momentum continues to build, our portfolio is shifting towards higher margin, higher gross markets and much less exposed to energy costs and our team is executing at a very high level. We're well positioned to deliver another year of strong performance in 2026 and we remain confident in the long term trajectory we're building. So thank you for your continued trust and your investment in Ecolab. I'll now turn it back to Andy Fort. Thanks Christophe. That concludes our formal remarks. Operator, would you please begin the question and answer period?
OPERATOR
Thank you. We'll now begin the Question and answer session. We ask that you please limit yourself to one question so others will have a chance to participate. If you have additional questions, you may rejoin the Q and A queue. If you'd like to ask a question at this time, you may press Star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. And our first question is from the line of Tim Mulrooney with William Blair. Please proceed with your question.
Sam Koswar
Hey, this is Sam Koswar, Montreal. Tim, thanks for taking our question here. You know, in your outlook I think you shared you expected gross margins to stabilize in the second half, which is quicker than I think some investors may have been expecting. I imagine that's because of the decision to implement your surcharge pricing pretty quickly when this conflict started. But can you help us understand how this fits into your goal of reaching a 20% Operating Income margin in 2027, including with the impact that the Cool IT system acquisition will have? Thank you, Sam. As mentioned before, I know most of you have these energy costs, oil prices top of mind and for me that's not the case because we've been here before and we've learned to master this very well. As a reminder. So commodities cost in 22 was up 50% and as you remember, margins went further up post cycle. Here we're talking 9% up as we see it in Q2 and we expect things to stay high till the end of the year at least. I'm expecting that six to 12 months. So we're expecting in Q2 to get the dollars back as we exit Q2 and then as you said, to get gross margin to stabilize in the second half including Ovivo. And if you exclude Ovivo as mentioned, gross margin would be up 70 to 80 basis points, which is our traditional run rate, which is as mentioned, in line with our model. So Operating Income margin will be even better because SGNA is going to keep improving as well. So during that time. So when I'm looking at the math as well of pricing and DPC and commodity cost, well, basically as you know, 30% of our DPC is roughly impacted by energy cost while growing 9%. That's the gross impact of inflation out there while it's 2.5% that we need to compensate. And that's why your 5 to 6% pricing in the second half brings us in a place where margins are stabilized at the minimum and that's obviously including Ovivo as well. So underlying so we improve even further. But as mentioned before so my priority is making sure that the organization stay focused on growth which means affecting our core businesses and building our new growth engines on high tech, life science, best intelligence and digital which today or tomorrow with cool it will represent 20% plus of our company which is really good news because it's high growth businesses in very natural growth industries, high margins and on a side note that have low to no dependency on energy cost and supply as well. So if I put it all together a second half that's going to be so stable to good in gross margin SGNA that's going to be favorable so it means a stronger Operating Income and Earnings Per Share delivery. If I look at 27 including cool it including as well the roll off of the Nalco acquisition, well we end up. That's my objective. So for 27 it's very early obviously. So to talk about a year from now. Well I think that we have a real good chance to be so within our five to seven top line goals and for to get to the 12 to 15 earnings per share growth in a pretty solid way.
Ronan Kennedy
The next question is from the line of Manav Potniak with Barclays. Please receive your question. Hi, good afternoon, this is Ronan Kennedy, I'm from Manav. Thank you for taking my question. Christophe, could you help us? How are you? Could you please help us understand the base macro scenario embedded in the guide? Does it assume broadly stable demand environment, modest improvement or does it contemplate an already cautious consumer posture and customer posture? Rather, given the higher energy costs, geopolitical certainty, etc. And given the backdrop and your comments regarding not necessarily having the higher energy costs and oil prices top of mind, is there macro sensitivity or is it just a function of your internal execution levers like the pricing, productivity and mix?
Christoph Beck (Chairman and CEO)
It's 90% execution. We live on the same planet as everybody else obviously here. But that's why our assumptions I think are pretty conservative with this 9% commodity inflation in the second quarter and expecting it's going to stay till the end of the year and probably into next year as well at the same time from a demand perspective expecting this 1% so in in the second half, Q2 is always a little bit harder so to to define in details as it's a transition quarter as we're here but I look at the second half I feel good about the 1% growth. This is our assumption. This is not my plan when I accelerate obviously. So our volume growth and pricing, so in that range of 5 to 6% as I mentioned before, so you end up with 6 to 7% top for the second half. So that's assumption. So for pricing, that's the assumption. 9% on commodity cost as well and kind of steadying this 1% volume, which means that there might be some pluses and minuses in terms of demand around the world. But for me, controlling what we can control, the fact that our growth engines are doing really well Collectively they're growing 12% at high margins. Our new business is at record level as well. I feel really good about that. Our core business is in a very strong and steady growth performance as you see and our underperformance, well our stabilizing the paper and heavy industries as well. So you bring it all together. I think that between our assumption and controlling what we can control by focusing on growth, managing performance at the same time, well, we end up in a place where the second half is a little bit better than we even thought a few months ago. So feel good about where we're going here.
Ashish Sabradra (Equity Analyst at RBC)
The next question is from the line of Ashish Sabradra with rbc. Please Ashish, with your question. Thanks for taking my question. So very strong growth obviously in high tech, 20% plus. You talked about CoolID also growing. Really about that 30% growth in 1Q. I was wondering if you could also talk about Ovivo, how that's tracking compared to your expectation. If you could talk about the cross sell opportunities of ovivo with your core offerings in high tech and also as you're thinking about cross selling once the Cool it acquisition closes. Thanks.
Christoph Beck (Chairman and CEO)
Thank you Ashish. So Global ITECH is going to become most probably our strongest growth engine in the near to long term future. And together with Life science I think that we have two amazing growth engines for the future of our company. Really focused on industries that are growth industries, high margin industries and very little depending on any energy impact as well at the same time. So kind of really a combination of sweet spots that I really like. So on high tech as mentioned, you bring everything together. Our legacy business, Evo, cool it. You get to a business of one and a half billion that's growing 20, 25% or more at high margin as well. At the same time we're exactly at the place we want it to be strategically. We want it to be the partners of the industry to help them produce better outcomes. Chips or data compute obviously with low to no water usage, which is a big issue for most of those industries and socially as well around fabs or data center. This is exactly what we're doing with Avivo that's helping in microelectronics will move from 5% water recycling to north of 95%. So it's absolutely game changing for fabs. And keep in mind so by 2030, 17 new fabs are going to be opened, roughly one a month. And Ovivo is the most advanced technology to recycle water at ultra pure level. And something that's really interesting with OVIVO that we've discovered is that the quality of the ultra pure water is having a direct impact on the yield of the chips manufacturing, which is game changing for the microelectronics industry. So great for them in terms of performance, chip manufacturing, quality of the chip and yield and at the same time reducing by 95% the net water usage. On the other hand, pool it. Well, you're all familiar with all the uproar that's happening around data center on water impact. Well with our end to end technology that we're going to bring to the market, well, data centers are going to have the water footprint of a car wash in one of the largest in the country in Milwaukee. Well, the humans in the data center use more water than the data center itself just to showcase a little bit of the power of that technology. So all in all, it's the first time in my career actually that I see on both fronts customers coming to us because they know there's not enough capacity to supply everyone. And we have the two best technologies for microelectronics and data centers out there. And customers want to jump the queue in order to be able on their side of use this to gain share in their own respective industry. So cool it. As mentioned, first quarter of the year, way north of the 30% that we were planning, which is a very good problem to have obviously. I think it's going to be a great story so for all of us and Ovivo will be as well in this mid teens type of growth. It's a longer cycle. Obviously business building takes more time than building data centers, but the backlog at Ovivo is way higher than what we had thought as well because of all the reasons I mentioned before. So I think that we've bet exactly on the right things that are going to pay off short and long term.
John McNulty (Equity Analyst at BMO Capital Markets)
Our next question is from the line of John McNulty with BMO Capital Markets, please. The question. Yeah, thanks for taking my question. Maybe just shifting tack to one, Ecolab sales growth. You called out notices above kind of the core, I guess. Can you, can you highlight how much better it was than the core and if you've got any ways to further accelerate the program now that you're, you know, you've been, you've been running on this program for, you know, for a couple of years now.
Christoph Beck (Chairman and CEO)
Yeah, John, it's been, well, a bit less than two years, but it's been a very good story. So the most obvious outcomes of it are on one hand, so food and Beverage United, where we're bringing soft food, safety, hygiene and water together. Well, you see the results of FNB have been very strong. So 5% growth. It's a major multibillion business in an industry that's not growing. Consumer goods are not exactly so growing really fast at the moment. FNB United is, and we've done only North America, by the way, so far. So we're expanding around the world and that's going to extend and expand obviously. So the impact on that very promising business. Second is our largest customers, our top 35, as I've shared with you, our top 20 and emerging 15. Those are the 35 that we focus on. They're growing quite a bit faster than the average of the company because of one ecolab. And last but not least through Agentec technology. And we're really at the forefront of any industry in how we're using that. Well, our savings in terms of performance have been remarkable while making sure that our teams remain confident that ultimately, so we will really focus most of our attention on growth while we drive performance as well at the same time. So early on the journey, but we see the pace picking up, which is exactly what we wanted and what we need in an environment or a global environment that's a little bit complex at the moment.
David Beckleiter (Equity Analyst at Deutsche Bank)
Our next question is from the line of David Beckleiter with Deutsche Bank. Please receive your question. Thank you. Good afternoon. Christoph on Cool It. Can you help us with the $0.20 of dilution in Q4 and what is your expectation or forecast for dilution in
Christoph Beck (Chairman and CEO)
2027 from Cool It. Thank you. Yeah, so thank you, David. Let me pass it to Scott. And by the way, it's $0.27 per quarter in the second half as we described that as well in the release and talked about so during the acquisition call as well. And it's going to neutralize in 27, but let me pass it to Scott and I can add any comment onto that. Yeah. Hey, David, as we talked about about a month ago when we had the Cool it call and as Christoph talked about is that the 20 cents per quarter this year again because the close date we don't know that exactly yet. So I want to make sure you understand what it is by quarter depending on the close. But as we've talked about a month ago, first of all excluding Cool it this year we're going to deliver the 1215 as Christophe talked about before and then this is the 20 cent reduction this year but as we think about to 2027, all with Cool IT including the amortization. But the net impact, the roll off of the Nalco amortization really offsets the non cash amortization from Pool it. So that's why we feel very good next year of staying in that 12 to 15% RA from a ETF's growth perspective which adds as well to it to the top line, which is why we did those two investments by the way. So on Arrivo and Cool it both going better than we thought while it's adding so a couple points on the top line as well. So it's acceleration on the top line aiming at this 5 to 7 for the overall company and strengthening the 12 to 15 earnings per share growth as well. So as we enter next year these are the objectives that I have that we build towards to. But so far things are going really well on both fronts.
Seth Weber (Equity Analyst at BMP)
Our next question comes from the line of Seth Weber with bmp. Barbara, please receive your question.
Christoph Beck (Chairman and CEO)
Hi guys, good afternoon. Wanted to ask about the life science business, the strength in the organic grade. You know, is this the step change that we've been kind of waiting for? I think Christoph, you mentioned that double digits is, is kind of in the near term, foreseeable future. But like can you just help us contextualize how this business is going to then react once the new capacity comes online? And you know what, what type of operating leverage should we expect to see kind of intermediate term in this business? I know you have the 30% number long term but, but if you are growing double digits, how much leverage can we see on the margin side there? Thank you. Thank you Seth. Well, the short answer is yes. This is the performance that we were looking for that we've been building towards too. And I'm really, really pleased with what the team has done both internally. Getting the capacity, getting the quality, getting our systems, getting our platforms, R and D, everything in order to get life sentences to the performance we're all planning for. So 11% in the first quarter we've said we're building a double digit growth business all in service, life, science. This is where we are, this is where we're going to stay. And honestly Seth, the idea is to grow even faster than that as well with an operating income leverage so getting close to 30%, I want to make absolutely sure that we keep it investing behind that business. So short to midterm, we might be in this mid-20s type of thing as we keep building like the plant that we're going to open so in the second half of the year as well, that's going to unleash even more capacity for that business. And then so knowing that we get to the 30%, I have no doubt that we're going to get there because it's all impacted by investment investments basically. So the performance in terms of leverage that we're getting now, I'd like to remind you as well what I said earlier as well. Our bio processing business, which is the core of our business, will grew north of 100% in the first quarter. This is very encouraging. It's not going to be every quarter the same like that, but the steady growth is going to be very strong in that business. Here we packed for now we need more capacity as well. So for it a good problem to have as well and with the fastest growing business in the life science industry. So right now, and I think that we're going to stay that way with a smaller, most agile, most innovative, probably most aggressive team as well that we have in the industry. Very happy with what the life science team has done. We finally where we're hoping to be.
Chris Parkinson (Equity Analyst at Wolf Research)
Our next question is from the line of Chris Parkinson with Wolf Research. Please proceed with your question.
Christoph Beck (Chairman and CEO)
Thank you Christoph. Obviously there's a lot to go on in terms of raw materials over the next two quarters but in terms of your 27 Command margin targets, it seems like you're actually well ahead in certain cases, you know, slash in line. But I'd love it if you can kind of walk us through the intermediate to longer term puts and takes of those targets and specifically how you're thinking about any newer dynamics across institutional markets as well as kind of the impending ramp of life sciences as well. Thank you so much. Thank you Chris. I feel really good with where we're heading, but let me have Scott so answer that question first and I'll be the. Yeah, thanks Chris. Hey, as Christoph said, we're very confident in the margin expansion. We're delivering in the path to 20%. I mean as you probably know the last few years we've delivered north of 500 basis points of Y margin expansion and feel very good about delivering the 19% this year. So that's 100 basis points year on year and then there's 100 basis points left to get the 20% next year which we feel very good about. And as Christoph said the surcharge is going well and so that the Q2 will be a transition quarter but feel very good about the second half gross margin as he talked about. And in addition as part of that driver that confidence we talked about that business mix where this higher growth, higher margin businesses, GHT Life Sciences, past Digital are also supporting that confidence in that 20% by 2027. But also in our longer term algorithm which we talked about that 100 to 150 basis points through 2030. And to build on that, as I've shared with you so many times, I'm really focused on beyond the 20%. For me the 20% is a given next year and when I think about it, our institutional specialty is already north of the 20%. When we talk about life sciences as mentioned before, software underlying is north of 20% as well. Net of the before the investment that we're making that you're seeing, it's getting north of 20% as well. Best elimination is north of 20% as well at the same time and most of water is as well at the same time. So we know exactly how to get north of 20%. For me to say what's the next ice storms that we want to get? I'll share with you as soon as I clear solid view on that. But it's going to be quite a bit north of the 20%. And when you think about Ovo and Kul it joining us, that's on top obviously with businesses that are growing really fast at very good margins. So feel really good about the 20%. So for next year 90% of my focus is really solid. What's Next? Post the 20% to make sure that we keep growing the margins of the company.
Vincent Andrews
Company. Our next question is from the line of Vincent Andrews with Morgan Stanley. Please receive your question. Thank you. Good afternoon. I did want to talk a bit more about global water and the margins and I think in the quarter, you know there are three dynamics going on. There was the Ovivo acquisition, you called out some raw material inflation. I suspect that hit you pretty hard in March which you obviously, you know, couldn't price right away for work and then the stabilization of the headwind of the softer sales in heavy water. And paper, but that, that you called out a upper single digit operating income growth decline which, which I would have thought would, have, would have, would have helped the percentage margin. So maybe you could just unpack, you know, the margin performance in global water, the decline and how those three different buckets contributed to it and how we should think about it over the next couple of quarters. Thank you.
Christoph Beck (Chairman and CEO)
So I'll pass it to Scott. But generally here. So overall water was flat in terms of Operating Income growth so slightly 0.5%. So down in Q1 if you exclude paper and heavy water. Well water has been growing top line mid single and operating income high single digits as well here. So generally water is doing really well ex paper and heavy. We're working on these two paper and heavy. But honestly most of my focus is really on the growth part of water. The combination of both, most of water getting better through higher growth, higher margin businesses like global high tech, well we get to a much, much better place very soon and at the same time getting the underperformance paper and heavy water stabilized and improving, we've reached the bottom for these two businesses. While the combination of both will lead to good results for the second half in water, I'm not worried in water but Scott, anything you'd like to add? Yeah, the only thing you'd mentioned as well is on Avivo and Avivo, as we talked about for the total company, there's a geographical mix between growth gross margin in SG and A but not a material impact at oi. So there's a little bit of that geography in the water business as well. But as Christoph said, we feel good about the business. The Operating Income growth excluding the paper and heavy which we talked about is very good. And we expect the water Operating Income to progressively accelerate throughout the year.
Patrick Cunningham (Equity Analyst at Citibank)
Our next question is from the line of Patrick Cunningham with Citibank. Please proceed with your question.
Christoph Beck (Chairman and CEO)
Hi, good afternoon. The specialty division within ins, pretty impressive organic growth in an environment where you see weaker foot traffic at consumer highly sensitive to wage inflation. Is most of your growth coming from deeper penetration of digital suites and productivity tools versus traditional chemical volume at this point? Yeah. Patrick, the short answer is yes. It's mostly focused on solutions that are helping them get the job done at a lower cost because they use less labor and best natural resources energy and water. And it's working very well when we think about the one ecolab approach. Well, we have a great example in FNB United, but we have a great example as well. So in specialty it's a business of scale of standards at scale of performance at scale. And the way the team is approaching those large quick serve fast food companies is to help them understand where is the best performance, what's the best restaurant out there in terms of guest satisfaction, cost and environmental impact. And to scale those solutions across the system around the world. And those are customers that are used to that approach, that are welcoming that approach. As you know, they're mostly franchised. So we have the opportunity with our team to influence every unit anywhere around the world the same way. And this is a huge upside for those customers. And you see it in the results. Growing 9% at the type of margins that we have in this business. This is quite remarkable. And last thing is, I'd say it's the beauty of the institutional and specialty business that we have is that wherever the consumer is going to go, based on the economic development, let's put it that way, well, we will capture them somewhere. It can be in a luxury restaurant, it can be in a mid scale restaurant or it can be in a quick serve. We're going to be there. Margins are very similar. So in a way we're extremely well positioned wherever the consumer is going to eat because ultimately some people are going to keep eating and if they don't go out, what they're going to buy from food retail, which is a business that's doing really well as well. Which is explaining why institution and specialty is such a steady, stable, strong business with high margin. Because it's a great offering for our customers to drive their own performance around the world. And at the same time, so for us we drive this huge stability and consistency because wherever the consumer goes, we will capture the them.
Shlomo Rosenbaum (Equity Analyst at Stifel)
Our next question from the line of Shlomo Rosenbaum with Stifel, please, your question. Hi, thank you very much, Christoph. I was just hoping to get a little bit more detail on what you meant, that the paper and the basic industries are turning the corner. Is the growth getting better over there? Is it that you've just seen, you know, you haven't seen any more paper mills that are closing. Like what's going on with the metal side of the it? Are we going to see those businesses get to flat this year? Just if you could give us a little bit more color because obviously the
Christoph Beck (Chairman and CEO)
other parts of the business are already running in the range where you want and these are the ones that are kind of pulling you down below that range. Yeah, because I mean the whole company, so if you exclude these two is growing. So 5% plus top line. So in a very good Place here. Water is also in that range with good volume growth as well. But I'll get any company has a few kids that need a little bit some special care because they are in older industries that are growing less fast. So the short answer is it's stabilized. We haven't been impacted by closures anymore in the last few months, three to six months which is something that's hard to mitigate because when they close a factory well there's not much against do. Obviously he didn't lose it to a competitor. It's just a factory. The mill closed. So we see that it's stabilized. For me if it gets into slightly positive in the second half will be fine. This is what the team is heading towards to. I'm feeling pretty good that we're going to get there. To be very honest, this is not where I'm spending my time. I'm spending my time on 80% of the company that's doing extremely well building those new engines as well. At the same time I want to be absolutely growth focused driving the performance at the leverage at the operating income side while we manage those businesses that are a little bit more struggling. But as I look at the second half I feel that these two are going to get to a more positive territory. And just also mentioning so they have good margins. It's not great but they're pretty good as well. So in a way they're not destroying value for the company which is the most important. So for me so 80% doing great mentions of Northern 5% company. So without these two at the top line as well, these two doing better. Well it's going to help the overall company as well in the second half and in 2017.
John Roberts
The next question is from the line of John Roberts with Mizuho. Please receive. Thank you. Is your inflation higher on raw materials or is it higher on your capex? Because you purchase a lot of equipment
Christoph Beck (Chairman and CEO)
that has metals and plastics contained in it. John, it's mostly on the commodity raw material side of things, logistics as well because logistic costs are going up, shortage of drivers, fuel cost. I mean traditional stuff that we used to. But no, the what you call capex which is more technology equipment. We don't call it capex. Yeah, there's some inflation but there's nothing dramatic here. It's not energy related as you know. So nothing to see there.
Jeff Sakaskis
The next question is in the line of Jeff Sakaskis with JP Morgan. Please receive your question. Thanks very much Christophe. You said that cool. It is growing a lot faster than 30%, is it growing 50 or 70 or 60 or can you quantify that? And secondly, when you think about competing in the data center market markets in direct to chip technology, does the competition emphasize water treatment chemistry or is their direction, you know, more equipment based? And how do you see your competitive status in offering water treatment technology in the direct to chip area?
Christoph Beck (Chairman and CEO)
So great question. Actually the true growth you haven't even mentioned yet in all the numbers that you listed. So it's even higher than that. To be honest. It's close to the triple digit range which is pretty cool. But I want to also mention, hey, we haven't closed that acquisition so just want to be clear here, we need to have the regulatory approval. So for that feels good so far that it should happen happen sometime in the third quarter. That's not depending on us but so far exceptional performance that those guys are having. And Jeff has mentioned I've met many customers in the meantime because we meet the same customers. Obviously they want what Cool it does more than anything. This is the company they want to focus on. You're familiar with a few others obviously out there. They're doing pretty well. One starting with a V obviously performing very nicely, has a very good backlog as well. This is the case as well. So for Cool it. So generally great growth trajectory. It's not going to be a straight line to heaven forever. We'll see how that goes. But generally I think it's going to be a very high run rate. And for me the biggest challenge we have is to make sure we can build enough capacity behind it in order to feed the growth. Great problem to have first time that we see really customers trying to jump the line in order to get the services from what Cool it can provide. Then the second part of your question. So for us, as you know, I don't really care whether products are or technology based or service based or digital based. What we are offering to the data centers is ultimately a higher uptime at a lower water usage and lower or better power performance. This is the outcome that we promising to them. The fact that we can go from low to zero net water usage is game changing for them. Jeff, you're familiar with the uproar that's happening around data centers in our country and around the world. Well what we do here is solving that problem. This is a big deal for the hyperscalers. Same time obviously it's enabling the more advanced chips that require the erected chip cooling as well. So we're exploring various models models as well here. They're all Recurring models in a typical ecolab manner. That's the way we're developing the business as we get together with what we do in terms of services. 3D trace optimization of water and power cooling coolant as well, which is by design a recurring product as well. And all the technology that comes with it as well as I've shared during the acquisition call, well every time that the new generation of chips come in, well you change all the system for the direct to cheap cooling which means new gold plates, new coolant and as the power demands of those up, you change the CDUs as well at the same time. So it's inherently a recurring business.
Matthew Dio (Equity Analyst at Bank of America)
The next question is from the line of Matthew Dio with Bank of America. Let's receive your question. Christoph, thank you and thanks for kind of addressing that. I feel like one of the concerns we hear from investors all the time on the Cool it deal is just it doesn't feel like a consumables business. But I had two to kind of backfill on this one. The 20 cents per share dilution that you're talking about per quarter, is that math based on the 30% sales growth that you had been laying out there or is that reflective of the 100%, near 100% sales growth that it's currently looking at and does that matter over the near term? And then how R and D intensive do you expect Cool it to be? Because presumably the technology change over here could be pretty rapid and cold plates and things like that. It's not really like a core competency of Ecolab Now I read tracer yes but maybe not so much this architecture and tech infrastructure stuff. So I'll leave it there.
Christoph Beck (Chairman and CEO)
So a few things here Matt, and then I'll pass to Scott if there's anything that needs to be added. So generally. So the base case is the 30% growth plus that we've talked about. So that's the base assumption. That's what we knew back then. That's what we based our assumptions on as well. And anything that's better is going to help us obviously. But Scott is going to add to that as well that question on the R and D and the knowledge. I'd like to just, just to remind you that it's a water business because directed chip cooling, well the next technology is to get towards water. Even the coolants that we are offering to customers today are not water based but water based are the best heat transfer coolant that we can imagine. Then you get all the challenges to work with water obviously scaling of Corrosion and all the things that comes together with water, especially when you work at lukewarm temperature, which are the latest Nvidia chips, the type of temperature that they're going to have. This is a business, this is a technology that we've been mastering for a very long time. Mastering water at higher temperature, mastering heat transfer. We are the leading cooling company, we can't forget that for 80 years. So thermal management really, really well. We have a lot of R and D here and the last thing is cool. It is super strong in R and D as well. You add to it the 3D tracer technology that we're going to bring together. It's going to be cool. IT Plus 3D tracer technology is going to become the new Ecolab offering for customers. The moment that we close as well, well, it's going to be game changing. So for our customers, customers ultimately so feel really good in terms of R and D. In terms of expertise. It's a typical one plus one equals three, which is exactly where we wanted to be. The water business, removing heat, which is what we've done basically for 80 years in most other industries and now in this new industry. Scott, do you want to add anything on the EPS impact? Yeah, one thing I would say Matt, on the EPS is as we've talked about, we think this is a very high growth, high margin business and that 30% sales growth is over the next few to several years and obviously in the earlier years with that averaging it will grow faster. So certainly as Christoph said, we like what we see and we see growth accelerating. But I still think that 20 cents is a good base case to have once we close per quarter and then we'll adjust from there once we get a hold of the asset for the second half of this year and then it gets neutralized in 27 because of the Nico monetization that's rolling off as well at the same time. So it's almost perfect for time for that.
Mike Harrison (Equity Analyst at Seaport Research)
The next question is from the line of Mike Harrison with Seaport Research. Please receive your question. Hi, good afternoon. Was hoping that I could ask a question on the pest business just in terms of the digital and kind of smart connected traps that you're rolling out. Can you give us a sense of
Christoph Beck (Chairman and CEO)
what percentage of customer locations are using those new traps? Traps. Maybe just give a little more color on the timing of that rollout and when you might expect to see some margin benefits as you get better efficiency from your sales and service force with those new traps. Thanks for that question Micah. I love that Business and I love it even more. Moving so towards the best intelligence. We have roughly 700,000 smart devices that have been implemented so far. As you know, it's been driven by the largest retailer in the world with whom we've developed that proposition. It's working extremely well, really resulting in close to 99% of pest free environment with much better service because, well, the 95% of the time we were spending in the past checking empty traps, well, is now so transformed into value add, which means selling more new accounts as well out there. The plan we have, Mike, is that in the next three to four years the whole pest elimination business is going to be a pest intelligence business. It's going to be a straight line. We have to make sure that things would be working well. We're going to reach probably a million connected devices by the end of this year and we'll keep ramping up in the next few years. That's going to have an impact on growth, it's going to have an impact on retention, it's going to have an impact on performance for our customers and yes, it's going to have an impact on our margins as well at the same time. And so far it's working really, really well. We have a great team on that project and customers are really thrilled about what they're experiencing here.
Lawrence Alexander (Equity Analyst at Jeffries)
Our next question is from the line of Lawrence Alexander with Jeffries. Please receive your question. Good afternoon. As you think about the surcharges and the pricing traction you have and how that has changed over the years, is your percentage value capture across your portfolio increasing or is it a matter of delivering more value but capturing the same percentage? And as you think about those dynamics, are the newer businesses where you prefer to focus your time right now, do they have a higher value capture level relative to the value create for the customer than kind of some of the older legacy ecolab businesses?
Christoph Beck (Chairman and CEO)
You know, Lawrence, it's something that we've perfected over the past four, five years. I would say we always do that in a way that is beneficial to our customers at the same time. And that's been a clear rule, which is why we make absolutely sure that the total value delivered to our customers is, is north of what we are capturing in terms of price. And not every business is created equal. If you go also to a biotech manufacturer or you talk about pest intelligence in a retailer or food and beverage for a brewery, it's very different and we do it in a very thoughtful manner. Over the last five years we haven't lost count Customers doing it as well, our margins went up. Retention has remained strong as well. At the same time, that's why when we talk about the surcharge, it's kind of a direction, it's providing a framework for our teams and our customers to understand where we're going. While in some places around the world you have more, in some places you have a bit less, in some of the businesses it's going straight to structural pricing as well. At the same time time it's working really well. That's why I was saying early on the call as well, this is something that we master really well. I'm not worried about it. This is an execution play that our teams are doing really well, the right way and we're going to be fine. We did this well and we're going to keep sharing with you the progress we're making here. But so far it's going really well.
Andy Whitman
Our next question is in the line of Andy Whitman with Baird. Please just use your question. Great.
Christoph Beck (Chairman and CEO)
Thanks for taking my question. I guess I just wanted to maybe elaborate just a touch more on that one. It seems like the achievement of the energy surcharges be important for that second half ramp here. And so just given that, Kristof, as you look at, you know, the total customers that you expect to approach with the energy surcharge versus how many you've approached today and are aware that this is coming, can you just help us understand how many of them, what percentage of them have been approached and are aware of this coming and how many are still in the go get for the balance of the year for you to achieve your ultimate target there? Thanks. Thank you, Indy. Well, everyone is impacted. There's no exception. We said it's 100% of our customers in 100% of our businesses in 100% of the countries that we operate in. And it's not an easy task. We have a few million customers in 172 countries and 40 different industries. But it's the third time we're doing it. We started April 1, so it's a few weeks back. It's pretty new. It's progressing very well. The mechanics are there, the systems are there, the tracking is there. I know every week where we are on pricing overall as well. That's why I feel good with the progress that we're making here as well. At the same time and the objective that we have is to be mostly done at the end of Q2, early Q3 while we keep building as well on the structural price and as you know, Andy, Ultimately all the surcharge is going to be converted into structural as well as as quickly as we can. And in some of the businesses it goes straight to structure as well institution and so being one of them as well. So the mechanics are there and that's why we can go much faster and we can do it with a much higher level of confidence as well than in the past because well, maybe unfortunately we've become really good at it.
Jason Haas
Our next question for the of Jason Haas with Wells Fargo, Please receive your question. Hey, good afternoon and thanks for taking my question. I was curious if the conflict in the Middle east has had any impact on any of your end markets in terms of like hitting your customers confidence in any way in any segment. Thanks.
Christoph Beck (Chairman and CEO)
So the short answer is yes, but Middle east is a pretty small business. So for us it's a few hundred million. It's critical for the customers that are there and that's why we take it very seriously and we don't let any customer down over there. There's no customer location that we have left. No we there we're helping them especially in difficult time. Some of the units were closed for all the reasons that we're familiar with. So it's immaterial. And we want to do things the right way for our customers, for our teams as well. We have practice with it as well. Our customers trust us as well. So to be with them as well at the same time and most importantly our competition has a very hard time to supply and to serve those customers a great opportunity. So for us to gain shareholders share as well at the same time. So it might impact slightly our volume growth in Q2, honestly I don't care because it's going to help us in the second half ultimately as we build on new shares in the Middle East. So I look at Q2 as a transition quarter but the way customers are reacting, they love what we're doing. The fact that we share in the toughest of times as well. It's working well. Really proud of of what the team is doing over there and it always pays back after those phases are behind us.
Josh Spector (Equity Analyst at UBS)
The next question is from the line of Josh Spector with ubs. Please receive your question. Yeah, good afternoon. Thanks for squeezing me in. I'm unfortunately going to continue to ask on the price cost side of things, but I just wanted to get some clarity that it's a little bit odd to me that you're talking about high single digit roth inflation in 2Q. I mean that's, that's coming quicker than I think I would have anticipated. And then you're not really saying that it's going to increase through the rest of the year which most other companies are expecting higher inflation in the second half. So I'm wondering one, what's different or unique there and then two, just your ability to ratchet up that surcharge automatically. If inflation goes to mid teens from the high single digits is that baked in or is that something that has to be retrieved by you? Thanks.
Christoph Beck (Chairman and CEO)
So we buy a lot of products like over 10,000 as you know. So that's kind of the good news. It's very broad so it's pretty stable as well. So how it's increasing. It started in February as you know. So it's impacting the second quarter because of the inventories in between as well. So this expected impact of 8,9% of commodity cost in the second quarter, some are thinking it's going to go down. I don't. I think it's going to be flat to up to your point as well Here we accounting so for that as well we can manage that in terms of how we buy, how we save cost and most importantly so how we price as well at the same time time it's impacting a third of our commodities. So not everything obviously here. So we're pretty well insulated with it. And in the extreme case where things change completely, well we're going to go to the next level of energy surcharge. We did it in the past as well. We know exactly how to do it. Our customers are familiar with those discussions as well. This is not something I'm spending a lot of time on. This is something that our teams master extremely well. They've had the opportunity to do that a few times with our customers and don't forget that we're providing more cost savings value to our customers operations than what we asking them to pay in price as well. That's the reason why surcharges get into structured price and that's the reason why customers customers are staying with us as well at the same time. So this is something that is not high on my priority list because I know it works. I know our customers are familiar with it and I know that we're going to master it or whatever happens in the market out there. 80% of my focus is really so to grow the company while we manage cat. Like many other things that are happening in the world as well at the same time. This is just one of them.
Kevin McCarthy
The next question is from the line of Kevin McCarthy with vertical research Partners, please proceed with your questions. Thank you for taking my question and good afternoon. Christoph, I'd appreciate your updated thoughts on the subject of SGA leverage. Looks like you were able to decrease your ratio of SGA to sales by 130 basis points in the March quarter. Is that a reasonable trajectory to think about for the next several quarters? Maybe you could provide some updated thoughts on what you're doing productivity wise and the effect of acquisitions on that ratio as we model the company going forward.
Christoph Beck (Chairman and CEO)
Yeah, thank you Kevin. I'll pass it to Scott. But talking about what I said before, that the whole price surcharge delivered product costs is not exactly high on my agenda. SGA leverage is not high on my agenda either. And it's not because it doesn't matter. It's because it's very well mastered. We know how to manage price tpc, we know how to manage SGNA through technology. By the way, we're clearly at the forefront of all agentech in our organization and it's delivering great results. These two things not very high on my agency agenda. Those ones are really well mastered while we focus on the growth of the company. But let me have Scott give some color on the SGN evolution here. Yeah, thanks Kevin. So as you said, really good productivity on SGNAQ1 up 130 basis points. You know we are getting the benefit of what we're doing for the One Equal Lab program as we're launching digital and AI programs. As you noted there is some shift and I mentioned before between gross margin in SGA from M and a primarily Ovivo. So in the first quarter that accounted for 20 to 30 basis points but still driving 100 basis points underlying which is above our long term target. We've talked about in leverage being that 25 to 50 basis points. So on a full year basis I expect that SGA leverage to be around 100 basis points again including some benefit from Avivo because of the geography between gross margin and SG. But still the underlying is above our long term 25 to 50 basis points target because of in part the faster sales growth but also because of the great productivity we're driving. But over the long term still feel very good about that 25 to 50 basis points.
Steve Ruger
Our final question from the line of Scott, Steve Ruger with Oppenheimer, please receive your question.
Christoph Beck (Chairman and CEO)
Thanks very much for fitting me in. Just I'm going to touch on light water. You saw some solid sales in first quarter quarter expecting that again in second quarter. Do you expect transportation and green energy which were cited to remain the primary drivers going forward. And what's, what's driving those verticals? Is it, is it something just from a few large projects or, or is it a structural formation that's creating here?
OPERATOR
Well, Scott Lightwater is doing quite well actually. Transportation is one of them. What we do for them is ultimately better paint while using much less water and creating much less waste. It's a great offering that we are providing. So to the most advanced car manufacturers around the world that like the idea of better products at a lower impact and lower cost as well. Well, at the same time, this is something that we've built over the last few years. We have not been very long at it, but it's working really well with great technology. The green manufacturers as well. Totally different industry obviously, but a very interesting one when you think about solar panels as well. It's a technology that's very close to the semiconductor type of manufacturing. This is something that we must quite well and in some places around the world, so it's growing very nicely. And the last part that's in light water is what we call institutional water. Those are hotels and public buildings, office buildings, air conditioning, water management, legionnaires, disease management. And those ones are working well. We used to be much more in that business going so one unit by one unit. Now we are working with the large real estate companies around the world, the facility management companies as well around the world because like this approach of a standard performance implemented anywhere around the world, that's driving cost down and environmentally improved back at the same time down. So like what I'm seeing in the light water business and that's why you're seeing the performance keeping getting better and it's going to keep improving as we move forward into the year. So which is, which is a really good story actually here. So since it was the last question as well. So just to wrap up and recap a few things, we had a very good start of the year with strong momentum driven by what we like the most, which is record new business. That's exactly where we want to be in a world that's quite complicated. Our new engines are doing extremely well. High tech life science are really driving growth in dramatically good ways at high margin with very low impact from energy cost as well at the same time. And think I, I have full confidence in our team in managing margins both on the price, DPC equation, nsgna. As we were saying before, those are not priorities for me as the CEO, but much more so counting on the team to deliver as this team has always delivered and that's why I feel really good that 26 is going to be a great year for the company, both at Top Line and at the Bottom line when I look a little bit ahead. Well, the new engines that we have with Cool it and Avivo, you've heard about the performance. Both Top Line and Bottom Line are putting us in a very unique league to serve this industry. The same on life science as well. And that's why I think that 27 is going to be an even better year for us. So a strong 26 and an even stronger 27, which is what I've been committing to you for quite while and every senior year wanted to make some progress towards that ambition and I think that we're getting towards that as we enter the next year. So feel really good and even better about where we're going. So thank you so much for attending the call today and I'll pass it back to Andy. Yeah, great. Thanks, Gustav. That wraps up our first quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation. Hope everyone has a great rest of your day.
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