Greetings, and welcome to the Ecolab's First Quarter 2022 Earnings Release Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce your host, Mike Monahan, Senior Vice President, External Relations. Mr. Monahan, you may begin.

Thank you. Hello, everyone, and welcome to Ecolab's first quarter conference call. With me today are Christophe Beck, Ecolab's CEO; and Scott Kirkland, our CFO. A discussion of our results, along with our earnings release and the slides referencing the quarter’s results, are available on Ecolab's Web site at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which state that this teleconference and the associated supplemental materials include estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the Risk Factors section in our most recent Form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. Starting with a brief overview, continued strong double digit sales growth driven by accelerating pricing and further new business wins overcame substantially increased delivered product cost inflation and unfavorable currency translation to deliver the adjusted diluted earnings per share gain. Sales were led by double digit gains in our Institutional & Specialty, Industrial and Other segments with attractive growth in all geographic regions. We drove the strong sales performance in a rapidly changing environment where the rise in new COVID infections early in the first quarter slowed the global recovery and further disrupted supply chains while the war in Eastern Europe later in the quarter exacerbated the supply chain costs and geopolitical uncertainty. Our delivered product cost inflation soared an estimated 25% in the first quarter versus last year and added an estimated $0.55 per share of incremental costs to the first quarter alone. We reacted aggressively and continued accelerating our pricing, which reached 5% in the quarter, up from 3% in the fourth quarter. We now look for a structural pricing to increase 6% to 7% for the balance of the year. And when adding in our previously announced energy surcharge of up to 12%, we expect very strong pricing to overcome the substantial delivered product cost inflation. Along with our new business wins, strengthened business portfolio and improved productivity, we look to realize continued strong top line momentum for the full year. We expect accelerating earnings growth through the second half and expect to deliver low teens growth in adjusted diluted earnings per share for the full year 2022, understanding there's a uncertainty in the timing of the surcharge realization, which will become more clear as we exit the second quarter. This strong business momentum along with our enhanced value proposition and favorable long term macro trends position us well to leverage the post COVID environment and deliver further superior long term shareholder returns. And now here's Christophe Beck with his comments.

Thank you so much, Mike, and good afternoon, everyone. I'm very pleased with how the team continued to execute in Q1. In a rapidly changing environment, we remain focused on what we could control, like new business, pricing, innovation and exceptional customer service, while we continue to manage extremely well but we could not totally control, like obviously inflation, COVID restrictions and now the war in Eastern Europe. We started '22, actually, with strong momentum as our fundamental business drivers continue to improve, which is most important to me. Fixed currency organic sales growth accelerated to 12% with 7% of that led by volume gains from strong demand and new business generation. Institutional & Specialty, as you just heard, led the quarter with 19% organic growth, continuing its strong recovery while Industrial further strengthened its already healthy momentum by delivering 12% organic growth, which is even better than what they delivered in Q4. Our margins were also trending very well for most of the first quarter, even ahead of our own expectations as we were on a path to nicely overcome the significant delivered product cost inflation until the war in Eastern Europe started. As we all know, this had a major impact also on global energy costs, which impacted the last few weeks of the quarter. This spike in costs added an unexpected incremental $0.04 a share in the last months alone, resulting in a total unfavorable impact from delivered product cost inflation of $0.55 per share in the first quarter close to 70% of our ultimate Q1 earnings. Importantly, we overcame the significant headwind, thanks to accelerated pricing, which rose from 3% in the fourth quarter to 5% in the first quarter. And most importantly, we did all this while maintaining strong momentum in demand, new business, pricing…

Thanks, Christophe. That concludes our formal remarks. As a final note before we start Q&A, we plan to hold our annual tour of our booth at the National Restaurant Association show in Chicago on Monday, May 23. If you have any questions, please contact our office. Operator, would you please begin the question-and-answer period?

[Operator Instructions] Our first question is from Tim Mulrooney with William Blair.

Just one question from me today, Christophe, on the delivered product costs. I know you said they were up 25% in the first quarter. Can you just talk about how inflation trended through the first quarter and through April, and then how you're thinking about that progression through the second quarter?

Actually, we've become experts at this. Unfortunately, if I may say so -- and it's important to step back, probably because when we look at 2021, so last year. Well, the first half of the year, there was almost no inflation. It was close to 1%. And then the third quarter, as we remember, so move to 10% for us of this delivered product costs, which represents 25% of our sales, as you know. And then in Q4, so it doubled to 20% and the full year saw 10% of inflation for Ecolab, so for 2021. And also to your point, in Q1 2022, we're expecting kind of the same as in Q4, so the 20%. Well, it moved to 25% because of the war in Eastern Europe that started, so at the end of February. And we're expecting initially Q2 to be the same as Q1 or Q4, so 20%, 20%, 20%, and ultimately, we ended up with 20% in Q4, 25% in Q1, 30% expected in Q2. So when you're talking about April, so it's trending towards this full second quarter of 30%, which we expect that for the full year we should end up with 25% inflation for [DPC] when we were thinking initially that it would be 15%. And to put it in perspective, Tim, just to conclude here that will represent roughly $1 billion over 18 months that we will have to overcome, which we have overcome. So the part of ‘21 last year and delivering EPS growth, the same in Q2 as well and really the same as well for the quarters to come in 2022.

Your next question comes from David Begleiter with Deutsche Bank.

Christophe, looking at Q2 guidance, if you look at the various puts and takes on volume and pricing, et cetera. Can you discuss why we only approached last year's [indiscernible]. And secondly, what drives a strong earnings growth in the back half of the year?

That's a big question, David, but let me do one by one. So first, Q2, if I may. Well, the situation changed obviously, so when the war started at the end of February, because the first half of the first two months of Q1, we had a great start. We were trending really well, both in terms of top line momentum. You've heard this 12% organic growth driven by 7% volume and 5% price. Well, at the end of February, things changed. So we were ahead of our expectations. We were getting ahead of [DPC] inflation, and we're expecting to deliver strong Q1 and really get in a very good position for a strong Q2 delivery. That was before the war started at the end of February. So when the war started, we obviously saw good impact on the energy cost, which triggered that surcharge that we've talked about, where we had just a few days basically to decide that globally, all businesses, all countries will move together in order to compensate for this additional energy cost. As you've heard before, so this month of March added $0.04 to our delivery. And for the second quarter, well, you get three months of that obviously and trending up, unfortunately. So it will all depend now, as I mentioned in my opening remarks, on the speed at which we can deliver the surcharge, which is going well but it's a complicated exercise. It's a 40 end markets, it's 170 countries around the world, we want to make sure that all customers are aligned with it as well in order to have the right, obviously, revenue recognition. We're going to make sure we don't have collection issues as well. So it's hard to know exactly how the timing is going to be. So…

Just quickly on the surcharge, how quickly is the design to roll off if and when oil prices do ease off as well?

That's something that we will have to discuss with customers. I don't think that it's going to happen overnight. But it's taking a few months to implement. It's probably going to take a few months to roll off as well whenever that's going to happen.

Next question comes from Manav Patnaik with Barclays.

Christophe, I just had a big picture question for you in terms of outside of obviously, the inflationary pressures you talked about, just curious if you're starting to see any macro pressures, maybe specifically in Europe, given all the press around it.

So generally, so far, so good, but we're all reading the newspaper and looking at the news, obviously. So when I think in terms of demand for what we do, it's very strong. All companies have made sustainability commitments, as you know, and they need always more of our services in order ultimately to deliver on the sustainability commitment. On the other hand, as well from an infection prevention as well, food safety, COVID or whatever else that can be as well, our customers ask always more so from what we're doing. So we don't have a demand issue. We're really on strong trends, which is really good. So so far, we haven't seen or perceived any slowdown with two exceptions. The first one is institutional, the restaurants and the hotels, but especially the restaurants. So we thought that it would open up quicker during the first quarter and continue on that trend during the second quarter. Well, it's been slower from a market perspective than what we were expecting. So is that as an outcome as well of the economic pressure at the beginning of the year, it was related to Omicron obviously. But now is it because of interest rate and price of oil and so on, we'll see that. So that's one small indication. The second one is China because of the [load] counts over there that are more extreme than everyone was expecting. It's 4% of our company. So anyway, it's a good news, bad news. Sometimes I would wish it would be much bigger. Today, I'm happy it's only 4% but that's probably there that we might have as well, so some darkening clouds, hopefully not, but that could happen. Otherwise, so far, so good. The last thing I would mention, Manav, is probably currency. As you know, the dollar is strengthening. We're expecting so kind of roughly $0.10 for the full year and it's doubled as we speak right now. So I would imagine that, that's going to strengthen as well, so it might become as well a further headwind.

And maybe just asked another way, like maybe near term, medium term, longer term, like if demand is not an issue, like do you plan on changing your sales force growth strategy at all?

I want to make sure I understand right what you're saying when you say sales force growth…

Would you be hiring more people -- would your pace of hiring increase given all this demand out there?

So yes and no. In the past, I would say, pre-digital times, our growth was almost directly correlated to our growth of our field sales force. That's changing now over time. It will still keep growing but not at the same pace as it used to over the last 98 years, of the 99 years that we've been in business, because digital automation is obviously helping us automate a lot of transactional work that our team is doing today, like driving a bunch of stuff you can do so with remote monitoring, preparation as well of sales calls, you can do much more so on the computers now, and we've implemented all that over the past few years, as you know, that requires less homework as well to get ready for customers, fixing equipment as well, we can do that remotely. So there's a bunch of stuff that we can automate through digital technology, which will disconnect to a certain extent the growth of other company and the growth of the field force, which drives as well to SG&A productivity.

Next question comes from the line of Steve Byrne with Bank of America.

I'd like to better understand this energy surcharge, is it defined by oil, natural gas or electricity, or does that depend on your customer? And just want to make sure I understood you correctly about the inflation you're expecting in the second quarter. If I understood you correctly, you're looking at a 30% inflation, maybe 20% from raw materials and 10% from energy just that I hear you right. And if so, are you getting any pushback on this energy surcharge given it's roughly twice the magnitude of your structural price increases.

So two parts. The first one, we've announced that to customers around the world, it's a global surcharge for the whole company, all customers, all industries, all countries around the world. It gets implemented slightly differently business by business then afterwards. Think about pest elimination is very different than a heavy industrial business like paper, for instance. But the general principle is, yes, it's related to the price of oil. And what we've said is that the surcharge will be between 8% and 12%, it can go higher than 12% if the oil price gets higher. But 8%, 10% and 12% are related to oil pegs that we've defined as well so with customers. So if the oil price goes further up, the energy surcharge will go further up. We wanted to have it temporary, mechanical, formulaic as well that customers know how it works, when they get it, how much it is, when it gets off as well. That's the theory. The practice is obviously a little bit different as mentioned before. So pest elimination might be different than a heavy industrial business. But generally, we discuss with all customers to get it right, making sure that it's an offset to the energy increase or energy cost increase that we have in our P&L. And so far, it's gone quite well with customers around the world. It's early. We've been three weeks at that. So it started April 1st. But so far, so good. It's going to take a few months to finalize as well. So I'm quite happy with the progress we're making right now but there is still some work that remains in order to get to the right place. I might pause here just to make sure that I'm addressing your question.

I wanted to also ask you about the Purolite acquisition. You got four months under your belt now. Is anything surprising you, anything going slower than you expected or anything that's a positive surprise?

Well, all of the above. It's progressing well with all the usual challenges of M&A of integration. It was a family company. I would call it a big start-up as well. So then suddenly, you end up in a larger corporation with processes, with practices, with organization and all that, Obviously, there is some fraction that needs to be aligned, but we're in a very good place. In terms of team, you probably know that our leader for Purolite is a General Manager who comes from Ecolab since the two brothers retired. They were all 80 years old or quite. So that was very natural. So we have a team combined from former Ecolab -- former Purolite people and people coming from Ecolab as well. From a performance perspective, you know that business was growing double digit as we took it over in '21, it will be growing double digit in '22. What's important to keep in mind is that the first half of the year, we are capacity constrained. So the demand is higher than the supply we can provide, which is the reason why we are building a new plant in Pennsylvania and extending another one in the UK as well, and that's going to come online in the second half of the year. So we're going to have kind of this pattern of double digit last year, kind of slower growth in the first half this year, much higher growth in the second half of this year. And then after raises by '23 since capacity has been such a a big driver that we had to open in order to grow further. But last but not least, the more we look at it, the more we like it. It's an unbelievable industry, biopharma. It's huge. It's growing really fast. It's something we can address. There's very few competitors that can do what we can do as well. We have really saw a technology that no one else has in some cases as well. And what I like the most is that we can build a lot of things around it to really build that growth platform like we did 20 years ago with pest elimination and all the businesses that we have in the company than 10 years ago, [water] that came as well, so around food safety and hygiene at Ecolab and now we have Purolite that can serve the life science business, but also the industrial businesses to which we can add as well some M&A down the road, which makes it even more interesting. So all in all, I would do it again.

Our next question comes from the line of Ashish Sabadra with RBC Capital Markets.

I just wanted to focus on the Industrial segment. We saw some pretty broad based acceleration there across water, food and beverage and downstream. I was wondering if you could talk about what kind of momentum do you see going forward, and how much of it was volume versus pricing driven?

Industrial is in a great shape. It's [half] our company, as you know. They've been growing 12% organic in the first quarter of this year versus 7% in Q4, by the way, 5% was volume, 7% was price. And what I like the most is that we have acceleration on all fronts. Water moved from Q4 to Q1, so 8% [accelerated] to 11%. F&B was at 4%, is now at 10%. Paper was at 15%, remained strong at 16%. And Downstream, which has been stuck for two years, ended up the year at 8% and 16% in this first quarter as well. And what's really interesting is that there are some new engines as well in there, as we call them, like global high techs; with data centers growing fast as well, chemical industry as well, which is a new business that we've created; and animal health as well, which are kind of those future growth businesses that are adding to the momentum of that group, which is doing really well, broad based, all businesses, most countries around the world; in China, a little bit more tricky for the reasons I mentioned as well before, but otherwise, in a very good shape. And just end up on margins as well for that in Industrial, which is always a question. While margins were down 10% in Q1, but it's important to keep in mind, they were up 19% versus 2019. So before COVID struck as well. Industrial has really shown ultimately how do they behave during inflationary times that was pre, obviously, this cycle, that was '17-'18 cycle, ended up great margin improvement in 2020. And that cycle with very good pricing as well, we'll end up into margin leverage down the road as well as it did in the past and gets up in terms of margin ratio as well as we go through each of those cycles.

And maybe if I can just ask a question at the high level on the volume side. Obviously, very strong momentum in volume. But as we go through the rest of the year, the comps get a bit tougher maybe on the Institutional side, easier on the health care side. But you should start to see some of the benefit from -- better benefit from reopening. So how should we think about the volume trend at a high level across the company?

Overall, roughly the same for the reasons you mentioned, Ashish. Some are going to turn more positive and some are going to slow down for comp question, as you mentioned. But generally -- so top line is going to remain in double digit territory, and the volumes will kind of remain, for the most part, similar that's assuming there's no recession or big, obviously, events happening out there. But otherwise, I think it's a pretty steady momentum that we have across the company.

Next question comes from the line of Chris Parkinson with Mizuho.

Christophe, would you just take a step back over the last few years. Obviously, there have been a lot of ebbs and flows during the COVID situation or whatever you want to call it. You have launched a bunch of new, I would say, products but more likely programs in food safety, sanitization, among many other verticals. When you sit back and think with the management team about share gain potential, kind of where you are and where you could be. Just is there any difference in how you would peg your growth algo for the institutional portfolio or pieces of industrial versus the market and peers versus, let's say, a few years ago? Just how has that thought process evolved?

Well, generally, we're definitely gaining shares -- if we compare, obviously, always our growth with competitions growth. And I guess you do the same. So we're way ahead of most of them. We have some weaknesses sometimes that we recognize and deal with obviously. But I feel good in terms of shares that we're gaining across the key businesses across the key countries. If you take Institutional, as you mentioned, for instance, as well, it's interesting to take one fact since Institution in the US is so big. Well take our restaurant business in Institutional. Sales in Q1 are at the same level as they were in 2019, so pre-COVID. While the dine-in traffic in restaurants is [75%] down versus 2019 for all the reasons we know our staffing and all the staff that are [bugging] restaurants ultimately. But back to the traffic in restaurants is a third down versus '19, well, that's showing so how much share we've gained as well in that specific example of Institutional, and that could cover other businesses as well.

And just a very quick follow-up on health care. You mentioned the supplemental, some momentum with elective surgeries in the US, offset by a slower recovery in Europe. But the competitive dynamic kind of evolved there also during the COVID situation. Some of the HPCs got a little bit more aggressive. Can you just talk about your strategy there a little bit more, once again, where you stand today and what you -- how you believe you're positioned for growth and just comment on how Street should be thinking about modeling that over the next, let's say, two years?

Well, interestingly enough, before COVID, the major convergence of focus in health care was towards surgical. So operating rooms, central sterile, patient room, so really so that's centered around the operating room, which I believe was a very small strategy and it didn't come from me. So I take no credit about this one. But I think the company did it really well. Except that during COVID, well, surgeries got shut down, postponed and it happens a lot of times, so on and off, which drove everybody nuts, obviously, in the industry. And that happened again over the last six months with Omicron. So it's the right long term strategy, Chris. I have zero doubt about that because it's ultimately making sure you protect patient from hospital acquired infection, which is good for patients. It's good for the hospital because they reduce their total cost and they can operate as well more often, which helps because they don't need to repeat operations that they've done as well in the past. So strategy was right. It's still right for the future. It just got a lot of stops and go over the last two years, which was related to those elective surgeries that have been kind of shut down and restarted.

Next question comes from the line of Josh Spector with UBS.

I just wanted to follow up on the volume outlook kind of for the rest of this year and specifically in Institutional. I just wanted to think about if business travel improvement is something that becomes a meaningful kind of flex point for your outlook. So lodging room sold has recovered but arguably that's more leisure versus business travel. I think your exposure hotel and regional wise would be more skewed to the business side. So do you think that improves and is that baked into the second half outlook at all, or is that a source of upside versus your current thinking?

So business travel is a small part of our business. But it's impacting, obviously, so our lodging business, which is roughly 6% of our company, as you probably know. But we're taking, obviously, any help in the market out there. I think it's -- for the full year, we're going to have a lot of puts and takes. There's going to be some upside with travel. As you mentioned, so leisure is getting better. We feel it in our end market. Business travel is going to ramp up as well in the months to come. But on the other hand, I think that there will be some economic pressure as well on most people in the US and in Europe as well, driven by the price of oil, interest rate, subsidies, you name it, obviously, that we had during COVID that is going to go away as well. And we can feel as well or the industry can feel already that there's some pressure there. So there is going to be some good news and some less good news, but we'll see what's really going to happen over the next few months. That I can't influence. The only thing I can influence is new business. And new business in institutional has been doing extremely well actually during the pandemic and is continuing to do it right now as well on top of the pricing that they're getting, which is driving shares, as I was mentioning to Chris as well before. So ultimately, I think that institutional is going to be in a good place. One might say we could have grown even faster if everything would have been unleashed at the same time as well, well, that's not the way things work. So generally, the industry might slow down a little bit, and we might not grow as fast as we would have wished, but we will still remain in double digit territory in '22, which I believe is a pretty good performance.

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

A couple of quick ones from me. The release mentioned in food retail, I guess, because of staffing issues at some of the cleaning intensity had declined. Can you just clarify that staffing issue, is that because in the quarter, there was kind of COVID-related outages when Omicron was surging or is that because customers are struggling? I'm just trying to understand how transitory the issue is.

Yes, it's an interesting one, Vincent, because for the most part, the retail industry is doing quite well, especially the large customers, the large retailers that we are serving around the country and around the world. The trick is that they are all struggling with how much people they get, obviously, in their stores, so they need to choose where the people are going ultimately. They go and serve customers or do they do as well as much as they should. So on the the cleaning side as well, I want to be careful how I'm saying that, obviously, because we make sure that our customers are doing things the right way. But in normal times, they would do much more than what they're doing today. And it's all related to the staffing that the shifting are from one part of the store towards the commercial one, which is driving their stays as well.

And just as a follow-up, Scott, if I could ask you about sort of how you expect working capital trend through the year. Obviously, in an inflationary environment, you're going to and need more of it but looked like a pretty good build in the quarter and you finished the quarter with a low cash balance. So just how should we be thinking about working capital and free cash flow for the year?

As you mentioned in the quarter, there was a bit of a build, as you'd expect. So free cash flows were in line with what we expected for the first quarter and really just below last year because we built working capital and CapEx which you would expect as sales are growing, especially this strong. And so as we look for the year on a free cash flow basis, we expect that for the full year we would have free cash flows, it's really in line with free cash flow conversion, historical levels, which means that our working capital will sort of trend in line with the business growth.

Our next question comes from the line of Scott Schneeberger with Oppenheimer.

Christophe, following up on the Industrial segment. Just curious, in the press release, it cited unfavorable mix as a headwind. Could you elaborate a little bit on that please and just discuss where that's going? And then a follow-up in there is to a discussion earlier on Industrial about segment margin. A few years ago, pre pandemic in the mid-teens. How quickly could the margin get back to that level based on what you're seeing?

So two parts of you few questions, obviously. So margins and mix. So if I talk about overall margins, usually, it takes two years to kind of get through the margin cycle. So our inflation goes up and we get the pricing, we get the dollars back to the first year and the second year, we get the margins back and more, and that's how we've grown our margins in industrial, so at every cycle. And it's going to be the same in this one with one big difference is that usually the inflationary cycle will last much less time this time, well, we're already planning for two years, last year and this year. So the cycle is going to be a little bit longer but a very strong price muscle in industrial for a few reasons, first, because our premium products are competitive versus competition in terms of what they can deliver. So our customers are interested in paying more to get more as well out of it. And second, we have a pricing approach, which is driven by eROI, as you probably know, which is basically getting a share of the savings that we are generating for our customers as well. So it's kind of a very natural organic type pricing as well. So the underlying pricing, and then you have the inflation pricing that comes on top of it. So bottom line should be towards '23, I think that assuming that inflation obviously peaks now and eases in the quarters to come in '23. So we should really see so that rebuild and step up in margins in Industrial. That was your second question. The first one was the mix. There's three things. One is business mix. If you have paper, for instance, so growing faster than like water, paper is at lower margin than like Water. Well, that has an impact in the mix of businesses. Within a business, you can take downstream, for instance, we have an important offering, which is called additives that energy companies are using usually when the prices of oil are rather high because they can afford it. Well, those ones are growing really fast right now. They have lower margin than the chemical offering that we're providing to those customers. And the last one is the country mix as well. So depending on where you grow that has an impact as well on the overall margin of Industrial. So those are the three big drivers of this margin mix.

Our next question comes from the line of Kevin McCarthy with Vertical Research Partners.

Christophe, coming back to the surcharges that you're implementing as of April 1st. How much might you actually expect to realize in the June quarter? The reason I ask is, I think your press release on March 15th indicated a range of 8% to 12% and I imagine, in some cases, you get the high end immediately. In other cases, maybe the low and still other cases, perhaps you have some contractual limitations. So perhaps you can talk about the flow through as you begin to implement that program in the second quarter and also into the third quarter.

So two things, Kevin, and I can explain it in a complicated way and a very simple way. I'll take the simple one and we can get obviously some more in detail if you wish so. But the way we agree and align with customers in such a short period of time is really to make sure that the surcharge is an offset to the increase of commodity costs related to energy cost. So you get a net zero ultimately on our EPS delivery. But if we don't get the surcharge, obviously, we have a negative EPS delivery, because we get the inflation and we don't get the surcharge. So that's the way we think about it, really that the surcharge is a natural offset so for the increase related to the energy costs. So that's the first one. And the second, and I'll pause after that, so just to make sure that I addressed your question here. The second quarter ending June, as you say, Well, it's a transition quarter because obviously, we start from zero on April 1st and we hope to be as close to kind of -- in cruising speeds in June or July, which is why I'm not perfectly accurate on where we're going to be at the end of June because there's a lot of realization that needs to happen for those thousands of customers, millions of locations around the world in 170 countries. This is real work. It's evolving very nicely, very well. I like the progress that we're making, but it's an imperfect journey, obviously, since we've never done it as well. So that's the way we think about it in terms of net impact, an offset for the second quarter, well, it's not going to be a straight line to heaven, but it's going to end up in a good place sometime this summer. I don't know if it's going to be exactly at the end of June when the quarter ends.

And then secondly, I wanted to ask you about your Institutional earnings results in the first quarter, came in a little bit better than we had anticipated. I guess my question is, did it come in better than you thought internally? And if so, what drove the positive variance in that piece of the portfolio.

So just to make sure I get you right, so you're talking about -- you want me to talk about sales or margin or both?

I was referring to your operating earnings in global institutional and speciality.

Well, actually, so sales were really good. They could have been even better if omicron wouldn't have hit to the first part of the quarter. And the earnings were good but they're still not as high as they could or should be, because they've been impacted as well by the delivered product cost inflation. So good growth, good productivity work. You maybe remember that we've implemented in 2020 a global field system as well that is really automating a big chunk of the transactional work that our field force is doing around the world, that's driving better productivity. Innovation is adding to margin as well. We mentioned Ecolab Science Certified disinfection programs as well related to COVID and post COVID as well. That’s all helping on the margin. But the truth it's going to happen in the quarters to come and probably as well in the years to come. Because when all that comes together that the pricing gets ahead as well of inflation, I firmly believe that the institutional margins will be even better after that cycle than it was pre-COVID, whenever the past is going to be or the future is going to be but let's assume it's going to be '23. But Institutional on a very good path, both on top line and bottom line as well and the best is to come.

Our next question is from the line of Eric Petrie with Citi.

How are underlying sanitizing sales normalizing compared to the 2019 levels?

So that's an imperfect science, obviously. So it was -- when we look at all the sanitizing sales that we have in the company, it grew over 50% during the COVID times. And the way it looks like right now is that it should remain at roughly 20% above where it was pre-COVID, let's call it, 2019.

And then typically, your Institutional margins over history are higher than Industrial. How do you see that as you were talking about mix and so forth, 2023 and beyond and some of the growth verticals that you have in Industrial as well as net zero?

As mentioned before, so Institution is going to be better after that cycle concludes, let's assume, so '23, COVID inflation and all that. It's not all going to happen on January 1st, obviously. But post this cycle, the business performance, the P&L of Institutional is going to be better than it was in 2019 of pre-COVID. That's the first one for all the reasons I mentioned on the prior question. On Industrial, we've had a very good journey of margin improvement over the years. And interestingly enough, also happening during those inflationary cycles, we had the previous one. You maybe remember the margin improvement we had in 2020 was growing north of 20% in terms of operating margin and ended up in a very good place, which is why I just mentioned before as well earlier on the call, even the margins are down 10% in Q1, they're higher at 19% than they were in 2019 as well. So due to the pricing mix work that the team has been doing. So that's going to continue going forward. What you mentioned as well on net zero is obviously something that was much less relevant a few years ago, but that's becoming very relevant right now and going forward because many of our customers have made commitments on the sustainability objectives. Many of them are not progressing as fast as they were hoping for a bunch of good and less good reasons sometimes. This is obviously driving very good demand. So for us, we've created a dedicated Net Zero division now within Industrial in order to serve those customers as well that are the most advanced. And those customers tend to be higher margin as well at the same time, which will help contribute as well to better margins for Industrial, which down the road, I expect Industrial to reach the same level of margin than Institutional and potentially even better.

Next question is coming from the line of Shlomo Rosenbaum with Stifel.

Quick question, we had a lot of talk about pricing. I want to go back a little bit more to volumes. And just to ask, where are we on the overall company volumes like-for-like vis-a-vis 2019? In other words, how much is left in terms of return to normal play in terms of revenue potential? Like you talked about Institutional being back to where it was, but with in-person dining just down a significant amount. So if you were to put it like-to-like, what would you say the upside is or potential for revenue with just kind of normalization, say, coming if you were to assume that would come in 2023?

So I had to get to some numbers in order to get that. I want to make sure I get the right one. So from top line perspective, we're way ahead of 2019 already, obviously, but you asked the right question, so in terms of volume. So if you look at Q1 '22, we have businesses that are already ahead of 2019. Industrial is ahead, Healthcare & Life Sciences ahead, our Other segment is ahead as well. And the only one that's below 2019, roughly 10% in terms of volume is Institutional & Specialty and is expected to cross that line during the second half of the year, where we're going to be in a place where all businesses, I mean, all major businesses will be ahead of 2019 in terms of volume during the second half of the year.

So when I'm thinking about the recovery, you still have -- that should be largely a second half '22 and first half of '23, kind of improvement potential over there. Is that the right way to think of it?

Absolutely, especially in Institutional & Specialty, no doubt about that. That's why we're saying it's going to take -- it's kind of a two, three year cycle where demand is going to be higher just because the industry is recovering from a demand perspective and staffing, as we talked about before as well as you get more staffing in hotels, for instance, you've probably been in hotels lately, so the service is a little bit different, than it used to be even though you're paying the same prices for your rooms, well, it's not because hotels won't have it that way, they don't have staffing to do it. That's going to add as well. So to the demand for us because those people are using our product, that's going to be a good thing and that's going to help us drive demand in '22 and in '23. When it's going to stop? I don't know, but I think we have one or two years ahead of us of recovery, which is really good for that business.

And just for the follow-up question. Is one quarter really enough time to get energy surcharge across the expanse of the customers that you guys have. It just seems like it's -- you're trying to hit everybody. At the same time, people also wanted to make new sales. Is there a focus being taken off of new sales in order to be able to do this? How should we think about it?

So first, getting it all done in one quarter, the short answer is no. And that's why I'm saying that in theory, if everything were done in the second quarter in a perfect way, yes, we would be growing our earnings very nicely. Well, it's not going to happen because we started zero on April 1st and at the end of June, we won't be 100% done either for all the reasons that you're mentioning. And that's why it's hard to know exactly where we're going to be. But I know that this summer, let's put it that way, we will be in a very good place because all businesses, everyone around the world so needs to get this one done at the right way. So exactly for the reasons that we mentioned before. And the second point on the [prioritization] of new business versus pricing, we've been reasonably good at that. But I want to be perfectly honest with you. When we focus on pricing, let alone the surcharge, which is something totally new since we've never done that globally. Well, you get your eyes off the ball of new business. So I expect plan to slow down a little bit to get the pricing right but that's why we want to get pricing done as quickly as we can to make sure that new business maintains momentum as well down the road, it's hard to do both at the same time.

Next question comes from the line of Mike Harrison with Seaport Research Partners.

If I could -- I wanted to see if I could attack this question around underlying market demand a little bit differently. You've talked about business travel. You talked about maybe some macro concerns in Europe. I was just hoping to get some color more broadly on what you're seeing in terms of consumer behavior in an inflationary environment. Are there any signs at this point that inflation is starting to drag on consumer spending, I guess that would show up maybe in restaurant foot traffic. But most of us were not covering this space the last time inflation was this strong. So I guess any historical perspective you can provide would be very helpful.

Yes, a few things. First, that kind of inflation, none of us has really experienced that. I guess our parents did. I was not in business. So last time, it truly happened here 30 or 40 years ago. so it's totally extreme, totally unusual as we all know. So a few things here. First, we don't see a slowdown of demand yet. So that's a good news. But if we look at restaurants, especially in the US, if I look at the data that we get from the industry, you clearly see a slowdown of demand, which is most probably related to inflationary pressure because of oil, because of COVID, because of mortgages, you name it. But that's very early. So those are indications that are probably so important to follow. The third thing and last thing that I'd say as well here is that when we move through slower times or more extreme recessionary times, which we don't assume it's going to happen in '22, could happen in '23, who knows, obviously, that we've gone through many times as a company. And the good thing with the Ecolab model is that, yes, the growth slows down but we are still ahead of the market growth because we gained market share because we've all been discussed before in terms of new business, innovation, expansion of offering and so on there. So that helps us grow faster than the overall market and kind of dampen the recession that we might have on our top line. And most importantly, in more difficult times for our customers, they need us more because our value proposition, as you know, is helping customers get better results at the lower total cost, that's been true for 99 years as a company. So in more difficult times, potentially recessionary times, customers need even more what we're doing, which have been so reasons why Ecolab has been doing so quite well during slower or recessionary times.

And then second question on the high tech opportunity. I believe that's mostly centered around water and going into semiconductor fabs as well as data centers. Can you talk a little bit about your market position there particularly now that you've combined with Purolite. And are you in a position to win more than your fair share of opportunities as we feed some of this fab capacity expansion?

Absolutely, it's a fascinating business, which used to be part of like industries, our water business that was serving hotels, like manufacturing and so on. And now we've created a dedicated division that combines data centers and microelectronics. Obviously, they're related,but different. The main driver for data centers is to help those high tech companies reach their net zero ambition. And I mean you know all of them, they've all made bold commitments that by 2030, for most of them, they want to be zero or positive carbon and the same for water as well. We're the only company that can provide that to them, so that's obviously something we had to get organized in order to get there. And we're making very nice progress by working with those large companies. This is Ecolab at its best because we serve enterprise customers for a very long time, forever, actually. And we have them understand where are they today, how much water do they use, what's the objective to get to zero, what's the road map to get there and drive execution as well towards that while we make sure that we maintain a 99.9% uptime, so for all data centers. Then microelectronics, just to conclude on that, is different but related. We wanted to have the same people because it's the same type of expertise that we need in the field. Well, it's a production of microprocessors and that requires high purity, high quality water, which to a certain extent, we were doing in the past, Ecolab, but we could not do the highest quality of water that's being used in the production process of microprocessors. This is something that we can do now with Purolite which is the new offering that no one else can offer as well, which is helping not only Purolite but our global high tech business. So kind of the beginning of the journey. But so far a very good story where I think that we're in a position that we could truly own that market.

Our next question is from the line of Rosemarie Morbelli with Gabelli Funds.

I was wondering if you could touch on the progress you are making on Life Sciences. I believe we did not really touch on that particular part of your business during the call.

So Life Sciences has been a great business that we started, I think, five years ago, 2016. But Doug, who we did that. So again, I'm not going to take any credit for that. It's been a great business that's been growing to almost $300 million today, growing double digit, some of the highest margin that we have in the company. And it's a business that's doing well, is having hard comps versus '21 and '20 because it was such a crazy high growth that, that business went through related to COVID demand. But the underlying growth of that business is double digit and will emerge double digits in Q2 or Q3, I don't remember exactly, and will continue very nicely as well as the business. On top of it, because Life Science former Ecolab, if I may say, was really providing solutions to make sure that production lines, clean rooms, factories were safe and protected from any infection risk. Now we add Purolite, obviously, to it, which is purifying the product that's being produced in those production lines. So it creates a one plus one equals three type of proposition like water and food safety when we acquired Nalco as well. So it's going to help Life Sciences grow even faster. Today, together, so it's kind of $700 million, $800 million, growing double digit. We are constrained by capacity right now, as mentioned earlier on the call of the first year first half of this year roughly. But the demand is just getting higher. Two businesses doing really well. Getting together, the offering is even more interesting. We just need to be able to produce what we're selling and that's going to happen during the second half of this year.

Are you signing up large pharma facilities?

We do, that's where we focus on. So Life Science, Rosemarie, is 80% plus pharma and the balance is cosmetics, the traditional brands. But Life Science for the most part is pharma with now a renewed focus on biopharma on mRNA and monoclonal antibodies, which is really the industry within pharma that's growing the fastest and expected to be 40% of the overall pharma market by 2026 or 2027, so in the next few years are really interesting.

And then I was wondering, given the stock price decline, which continued today. Are you considering accelerating repurchases?

Well, it's what we've announced a few weeks ago or a month ago, I don't remember exactly the timing. I might ask maybe, Scott, if you want to give some perspective as well on that.

As we announced in March that we are repurchasing $500 million of shares during the year. And through Q1, as you might have seen that we repurchased a little more than half of that and we'll continue at that pace that repurchase program, depending upon market conditions, but also while maintaining our commitment to return to A range credit metrics by the end of next year.

Any way should nothing improve any way, you can expand that $500 million, or do you need -- do we need to wait until next year before you have -- will you take another look at it?

I think we'll keep pace on that $500 million this year. Again, as I mentioned, we want to make sure that we're committed to returning to these A-range level metrics by the end of 2023.

Our next question is from the line of Andy Wittman with Robert W. Barid.

I guess I just wanted to follow up on the earlier question around free cash flow. I think that question was centered more around working capital, and you said it'd be kind of like historical levels. But Scott, it looks like if you back into your EPS guidance into net income that kind of walks back up to around $1.5 billion of adjusted net income. Historically, I guess you guys have said about 95% is a good way of thinking about kind of free cash flow for Ecolab. So is that applicable for this year with higher-than-average growth rates and inflation. I guess that's the other way of kind of asking that question. But is basically that end up backs you into about $1.4 billion of free cash flow, is that the right kind of order of magnitude? And can you just comment again, if you could, on the CapEx budget for the year as well?

Just on your first question, yes, your math is about right in that mid sort of 90% range, which is our historical cash conversion. So that would be where we would expect the year on free cash flows to be. And then as we think about CapEx, talked a little bit about this after the fourth quarter, and we'll expect CapEx to return to sort of our historical levels, which is like 5.5% to 6%. And as you're probably aware, about half of that CapEx that we do is merchandising equipment, which is at customer locations. And so that will grow as the sales grow and as new business grows.

Our final question is from the line of Kevin McVeigh with Credit Suisse.

Christophe, I wonder any just client reaction to the price increases? I know you were thoughtful through COVID. So are they more accepted given how thoughtful you were through the COVID process, or just any puts and takes? I mean obviously, everyone is seeing a lot of inflationary pressure, but just any thoughts from a client perspective?

I'm really pleased with what we've done in pricing. So let's keep in mind, we have to overcome $1 billion over $1 billion over 18 months, so starting some mid last year towards the end of this year. So 18 months is a very short period of time as well. And we want to make sure that we do that in achieving two things. The first one is that we stay or get ahead of the inflationary curve. We've done it last year. We'll do it as well so this year as mentioned. We were on a path. So to be now basically ahead of the inflationary curve in 2022 that was prewar in Eastern Europe. Now it's postponed a few months, but add the energy surcharge to that and we'll get to the right place as well. So it's on one hand, making sure we cover inflation and at the same time that we do it in a way that we grow our margins as well down the road. Second objective we have is to make sure we're not losing customers. While we do that, it's not a 100% play, obviously, but that we can maintain 90% plus of our customers, which we're doing. We haven't lost any major customers while we were doing that because we need to keep in mind that we're a growth company. I want to make sure we keep our organic momentum, which is extremely strong right now while we get the pricing right, while we keep the customers because down the road, that's the beauty of the Ecolab model when your fundamentals are right of new business of innovation, of pricing, of customer retention and that inflation eases you get very significant windfall in margin, which we know always happens. The question is, when is it exactly going to happen. But so far, so good. I'm very pleased with what the team has been doing in terms of pricing, while keeping the customers and driving growth at the same time.

At this time, we’ve reached of our question-and-answer session. I'll now turn the floor back to Mike Monahan for closing remarks.

Thanks, Rob. That wraps up our first quarter conference call. This call and the associated discussion and slides have been available for replay on our Web site. Thank you for your time and participation, and our best wishes for the rest of the day.

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