Greetings. Welcome to the Ecolab's Third Quarter 2022 Earnings Release Conference Call. At this time, all participants will be in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations. Mr. Hedberg, you may now begin.

Thank you. Hello, everyone, and welcome to Ecolab's third quarter conference call. With me today are Christophe Beck, Ecolab's Chairman and CEO; and Scott Kirkland, our CFO. A discussion of our results, along with our earnings release and slides referencing the quarter's results are available on Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which state that this teleconference and 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 refer you to the supplemental diluted earnings per share information and release. With that, I'd like to turn the call over to Christophe Beck for his comments.

Thank you, Andy, and welcome to everyone. In Q3, our team delivered another strong quarter, with steady double-digit organic sales growth of 13% and total pricing that accelerated from 9% in the second quarter to 12% in the third. Industrial grew 16% organic, with 15% pricing, and Institutional & Specialty grew 12% organic, with 10% pricing as market stabilized. The Other segment, led by Pest Elimination, continued on its strong trajectory with 13% organic and 7% pricing, and Healthcare and Life Sciences with year-over-year comparisons finally stabilizing, and with Life Sciences clearly leading. Most importantly, accelerating pricing exceeded continued substantial delivered product cost inflation, with the net benefit expanding significantly since the end of the second quarter, which helped further ease year-over-year gross margin pressure. This, along with increased productivity gains, led to renewed positive growth in fixed currency operating income with nice gains in the Industrial, Institutional and Other segments. All in all, a clear and further step on our journey to fully recover our margins and get back to strong and steady earnings growth. With this clear commitment to continuously improve earnings performance, quarter-after-quarter, we have been preparing for an environment where inflation will remain high for longer and interest rates will impact demand. This is especially true in Europe, where the war and the energy crisis are impacting demand and global energy costs. In my view, this is just the beginning, with inflation in Europe at 11% as of yesterday, and natural gas price is 60% higher than a year ago, which is the equivalent to $180 per barrel of oil today with future pointing towards $230 by the end of this year. More importantly, we're taking early action, as we take a realistic view of what's ahead and we continue to expect earnings growth to progressively…

Thanks, Christophe. This concludes our formal remarks. Operator, would you please begin the question-and-answer period.

[Operator Instructions] And our first question is from the line of Manav Patnaik with Barclays.

Christophe, I just want to clarify the comments around progressively improving towards double-digit EPS growth. I was hoping you could elaborate that a bit more? And is the headwinds in that comment primarily on the margin and, I guess, European side at the moment, or are you anticipating like a broader U.S. or global recession in that, too?

Good question, Manav. Thank you. It's mostly Europe, but it's also the macro view. And that's our assumption, which might be overly realistic. If I may say that inflation is going to stay high in 2023, that the dollar will remain strong as well, interest rates might impact demand as well at some point. But most importantly to your point, that Europe is going to have a tough winter. So, we've been improving our performance quarter-after-quarter from Q2 to Q3, expecting the same as well for Q4, and leading towards the double-digit historical growth that we've had in the past as well sometime in 2023, that we can have really an improvement that's steady quarter-after-quarter, mostly driven by steady growth, which has been so really strong over the past few quarters and will remain as such and pricing, that's going to keep to strengthen as well over the quarters to come as inflation hopefully, stabilizes and goes down at some point.

The next question will be coming from the line of Tim Mulrooney with William Blair.

I know there's concerns about softening Europe and FX headwinds. But based on our math, it still seems like the number 1 determinant for EPS growth is still around gross margins. So, my question is, assuming no more significant spikes in raw materials and based on what you expect for pricing, when would you expect gross margins to begin to expand year-over-year? Is that most likely sometime in the second half of 2023? Any directional guidance would be helpful.

Yes. Thank you, Tim. So with the assumption, obviously, that inflation remains high for 2023, as mentioned before, that the dollar remains strong as well, and that's Europe. So, I'll get through its winter as well. I would expect gross margin to expand in the second half of 2023 and improving from now to then. If you look at general margins for the Company as well, and it's important to note that as well. So between Q2 and Q3, the margin pressure has been easing as well. So, we had 270 points down in Q2. We had 180 in Q3. And most importantly, if you look at Industrial, which is an interesting bell weather because that's where you have 2/3 of the inflation pressure, if I may say, well they improved from 340 down in Q2 to 130 in Q3, and will keep improving in quarters as well to come. And if you look back in 2020, Industrial, which went through a similar cycle, not that extreme, had great OI improvements as well. So during 2020, that's a good indication of what's going to happen in '23 and what's going to happen across our businesses as well.

Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank.

Christophe, in healthcare, margins are a little bit lower than we expected. Anything driving that downturn in margins you saw in Q3 in healthcare?

Thanks, David. Healthcare, I think, has reached the low point in Q3. And now, we could see the trends coming back up where surgeries are starting to get back to normal levels. We could feel that over the past couple of months. Inventories as well of COVID-related products are kind of melting, which is good as well. And most importantly, so pricing moved from 3% in the second quarter to 6% as well in the third quarter, and we keep improving as well in the quarter to come. So, I think we're turning the corner with the lowest quarter in the third quarter in healthcare. But let me be clear, as I've always been, I don't like the performance of that business. That's been true for quite a while as well. But I'm absolutely committed to resolve it over the quarters to come and '23 is going to be a transformational year for healthcare in many ways.

And just on the cost side, in 2023, why not assume more cost relief overall in your businesses if demand is lower globally?

You're talking about healthcare or...

Overall. I believe you're assuming that costs hold in there next year despite some lower demand. Why not -- why wouldn't costs be lower next year, demand has softened globally?

It's a good question, David. So, we're taking probably an overly realistic view, but it's basically saying that the high delivered product cost that we have today will remain for 2023, which is why when we can improve our gross margins and operating margins as well, which, by the way, have turned positive as well, in the third quarter, it's already a remarkable achievement, if other things that inflation is going to ease and go down during 2023, while our margin leverage will improve dramatically as it always does. But I'm not counting on that for now.

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

I guess, I was hoping to drill down a little bit more on the institutional business. Whether you've seen any kind of -- whether you saw any deterioration kind of through the quarter, just in response to the high price increases, whether that's starting to have any impact on customer demand? I guess, I'm just trying to understand what's happening more specifically in the institutional business, and then just any specific color on Europe institutional that you could share?

Yes. Thank you, Seth. Actually, we're not seeing an easing of demand, which is good in Institutional. Honestly, I was hoping to see even more recovery as well, so in that market, which is kind of not really happening as fast as many were expecting as well. So, when we look at the growth we have in Institutional, it's all self-made. Today, we're ahead of pre-COVID levels, which is quite remarkable when you think that just a comparison point that in the U.S. the dine-in traffic, so people sitting in a restaurant is down close to 30% versus pre-COVID level as well and our sales are ahead of 2019. So, I like the growth that we have. We don't see a softening of the demand, certainly not because of pricing, which is good by the way as well in Institutional. So, so far so good, but we'll need to drive even more demand through new business, penetration, innovation. And as well, so keeping in mind that this industry, we'll be facing even more labor challenges going forward, especially on the cost side, but also food cost and energy costs are going to go up. So, what we're doing for customers is exactly what they need and we'll need even more in the quarters to come, which is reducing their cost while serving their guests the best possible way. So, positive with Institutional, I like where they're going. And I think we're going to see good things. But at the same time, I'll just conclude on one point. We know it's an industry that is in quite a big transformation, which I think that is an opportunity, and we will keep transforming our own business as well so to adapt to what the customers need the most.

That's helpful. Thank you. And then maybe just a quick follow-up on the Purolite capacity adds. Can you just frame for us the pace of that and just the order of magnitude that you're looking at on Purolite capacity additions for this year and next year? Thanks.

Yes, great question. So a different topic. Obviously, on Purolite, as I mentioned as well all along. So we are building capacity expansion, and it's coming on line as we speak in the U.S. and in Europe, so on both continents as we had planned as well. So in 2022, it took us one more quarter to get to that right place. It's really to do it well, to do it the Ecolab way as well. And we've been obviously saw squeezing that business because supply was limited, so we could not obviously supply more than what the plants could produce as well at the same time. So when I look a bit ahead, so Q4 is going to be a very good quarter for Purolite. We have almost all orders filling the whole quarter, so there's no big risk in that quarter. And for 2023, if we're going to like Q4, I think we're going to love 2023 with that business.

The next question is from the line of John Roberts from Credit Suisse.

In your December quarter guidance, what areas do you expect to be down in volume, either year-over-year or sequentially?

We're not expecting much softening, John. So in the fourth quarter, we were expecting that in Europe, things would be better, which would ultimately help us get even better in terms of volume. That's not going to happen. I might be overly realistic in Europe. But I think that the war in Europe, the impact as well on energy cost on all European economies as well over there is going to have a major impact. I hope I'm wrong, but that's going to be the bull's eye of the volume challenge. But overall, we're going to keep steady double-digit growth as a company and volume will remain quite stable as well versus what we've seen in Q3.

Okay. And is the -- is variable debt a priority to pay down, or do you plan to keep a portion of your debt variable since interest rates are hard to forecast?

Let me give that question to Scott.

Yes. Hey John, it's Scott here. Yes, we've got about 25% of the debt is floating right now. And so, certainly, the way rates are going, we'll expect some upward pressure on interest as a result, but not looking to pay off any debt in the near-term future and making sure that we have optionality as we look forward. And certainly, we have some debt coming due at the end of next year, and so we'll opportunity that based on sort of status of the market.

The next question comes from the line of Josh Spector with UBS.

Just now that you have a couple of quarters under your belt with the surcharges in place, just wondering if you can comment. Are those generally working as planned? And as oil’s moved down and gas has been really variable, how good has that been matching variability versus what you've seen?

Hi Josh, it's worked really well. Actually, we didn't know how it would be working when we started with the energy surcharge on April 1st. We have never done that as a company, so let alone on a global basis, all businesses all at the same time. It worked out really well. Some of the learnings for us, some customers who preferred having it directly in a structural pricing because it was easier for them to handle that. So, from a system perspective as well, and others chose the energy surcharge as a viable part as well to it. But it's covered very nicely, so dollar for dollar, what we were expecting. And most importantly, it's a tool that we can use as well. So going forward, with whatever could happen, like natural gas in Europe, it's been highly variable. As you've seen, it's on the lower side right now, still 60% higher than a year ago. It could double very easily over the next few months. Having such a tool that we can engage very rapidly is going to be a huge advantage for us and our teams.

So, I guess, to follow up, if that's worked well, and I mean, correct me if I'm wrong, but an answer to the prior question, you talked about not really a significant amount of additional volume weakness. You're talking about additional pricing, trying to go after new wins. Why wouldn't earnings be up sequentially?

So, the short answer here, Josh, is looking at the operating income, so in Q3, it's turned positive for the first time since the war started in Europe, which is a good sign. It's going to keep improving nicely as well in the fourth quarter and going forward in '23. Then you get the FX impact, which is something I mentioned as well in the previous quarter that impacted us down for the third quarter. That's the core of the story.

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

Hey Christophe, could you just circle back to just two quick comments on global healthcare and then Purolite. On healthcare, can you just give a little quick update on the U.S. side for elective surgeries and what that means for your outlook for 2023? And on the Life Sciences side, do you feel that the growth expansion opportunity of Purolite is well understood? And are margins in that business still where you are anticipating, or should we anticipate startup cost? Just any additional framework you could help us out there would be really appreciated.

Yes. Thank you, Chris. So a few questions, obviously, in there. So starting with Purolite. I'm looking at next year, exactly as expected. So, the second year of the Purolite acquisition, very promising. We're going to love what we see in 2023. It was hard in '22, obviously, to get everything lined up, to get the integration really well done, to get the city as well online with everything the Ecolab way. We are at that stage now, and that's why I see the unlock in Q4, so happening very nicely in 2023. So, being as good as we thought and potentially saw even better. So, a very good story. This is true for biopharma and this is especially true for our industrial applications as well, as mentioned in my opening, in nuclear power, in microelectronics and in lithium extraction as well, ultimately more demand than we ever thought as well from that end of the business. So Purolite heading in a very, very good direction. Life Sciences, your second question, is in a good place. We'll see as well in Q4 getting back to its usual trajectory and getting back in 2023, with double-digit top line and bottom line growth. So Life Sciences is in a very good place. It's always been -- it's been the past few years, the comparisons year-on-year have been a little bit complicated sometimes. But underlying no change, extremely steady. And then your last point on healthcare, it's in the works. This one, as mentioned, not happy with the performance of that business. I haven't been happy for a very long time. By the way -- and I see point for that business improving sequentially in the quarters to come. But I want to be perfectly honest in here, it's a radical change that's expected in that business. The old way of running that business is not going to work with me so going forward. So, we've made commitment that we're going to address it one way or another.

Our next question comes from the line of John McNulty with BMO Capital Markets.

So, I guess, the first one would just be on delivered costs. Can you help us to understand how much they went up in 3Q versus 2Q? And maybe give us some color around the baskets -- the bigger baskets, whether it's transportation, labor or raw materials?

Yes. Thank you, John. It was roughly the same type of pressure in Q3 versus Q2, which is 30% year-over-year. And since we had 10% last year, it's a 40% delivered product cost increase over two years. So if you want to count, the overall inflation, which is quite a bit to say the least. To your question on the basket, it's a bit evolving with oil price, so easing a bit. Natural gas went up during the quarter and eased a bit towards the end of the quarter. And then, you have cost tick in food and beverage and institutional that's going up in a big way as well at the same time. But overall, kind of the same in Q3 versus what we saw in Q2. And that's why I'm quite proud of what the team has delivered over the last five quarters. So Q2 last year, when inflation started to go up, well, the team has overcome over $1 billion of incremental cost with pricing that's going to stick for the future, which is good short term, but it's especially good for the long term because we will be protecting that pricing going forward.

Got it. Okay. No, that's helpful. And then, I guess you mentioned in your opening comments that when you look to 2023 with the help of pricing, you expect to see double-digit top line growth. Just when you think about the price catching up to raw materials, et cetera, does that mean that you have double-digit EPS growth in the cards as well, or is that still a little bit of a question mark?

It will happen during ‘23, during the second half. So most probably what's most important for me is making sure that pricing gets way ahead of delivered product costs, and we've done that quarter after quarter. Second is making sure that our operating income keeps growing. It's been growing in the third quarter, which is a good sign. It will be growing even more in the fourth quarter, and it's going to keep growing as well in the quarters to come, in 2023. Then you have the impact on FX and interest, obviously, that's mitigating that. We'll see how it all plays out in 2023. But as long as I have business momentum strong, that I have pricing getting way ahead of delivered product cost and that we have productivity in a positive direction as it is today as well, while it's going to lead to operating income growth that's ultimately going to lead to EPS growth as well sometimes in the second half of next year.

The next question comes from the line of Jeff Zekauskas with JPMorgan.

On slide 12 of your deck, you say that your delivered product cost inflation was 30%, but your SG&A is only up, I don't know, 14%, and product and equipment cost of goods sold is up a little bit faster than that. Can you reconcile those numbers? How do we go from 30% to 14%?

So 30%, well, is the increase of DPC, as I mentioned as well before, which is very similar to what we had in the second quarter. But SG&A, which is not obviously in our delivered product cost went up 14%. It's mostly labor cost that we have in there. We don't have more people in the third quarter versus the second quarter as well, which is important. So, that's why SG&A productivity ultimately is improving as well. And one point I should have mentioned as well in our SG&A, Jeff, we have also commissions for our salespeople and with much higher pricing, they get higher commission. That ends up as well in our SG&A. I hope that helps.

In looking at different chemical companies, like if you look at the petrochemical companies, I think that utilization rates for those companies maybe have gone from the mid-80s to the low-70s. And if you look across many industrial areas, what you're seeing is a tremendous liquidation of inventories. So, I'm surprised that your industrial business isn't feeling any of that for the fourth quarter because I would think your customers would be operating at much lower levels of utilization and water treatment chemicals should be a function of utilization? Is there some other factor going on?

You totally are right. So, if we look at pure same-store sale demand, so from one side, same applications from industrial, we see softening of that part of the demand. So, if we see industrial doing so well, and especially in places like in downstream as well, it was north of 20%. Well, it is driven by new business -- it's driven by increased penetration, new solutions for those same sites as well. It's innovation and it's pricing, obviously, which is going up so quite significantly. So, you're absolutely right with -- demand for one site is easing, and we’re feeling that. And we compensate it with new business. And that's why the new approach on offense, as I mentioned, so in the previous call well, is so important because we'll have to face those potential headwinds as well.

The next question is from the line of Ashish Sabadra with RBC Capital Markets.

Christophe, I just wanted to circle back with the comment that you made on the first half versus second half earnings growth, about double-digit earnings growth in the second half. I was just wondering, even in the first half, we should see earning growth, right, maybe not in the double-digit range. And I was wondering if you could elaborate further and see like with this combination of first versus second half, could we still get to a double-digit earnings growth for the full year in '23? Any color will be helpful. Thanks.

Ashish, it's very early. We usually never talk about next year before the publication of our results of the fourth quarter in February, but I chose intentionally to share with you early enough what we’re seeing, and things are going to evolve, obviously, in the next 3, 4 months until we get back together. But it's really trying to share with you what we're seeing, what we're assuming. And our assumptions are really inflation stays more or the same level for the whole next year, that the dollar remains strong as well for most of the year as well in 2023. Same with the interest rate and with Europe getting tougher as well, so in the months to come. How it's going to play out exactly? I don't know yet. And I don't think that anyone knows. But when I know that we're going to maintain our strong momentum, top line volume and pricing. So together, that we will keep expanding pricing as well as we've done in quarter after quarter over the quarter five as well, and that we're going to get some upside from the European program that I've announced as well. Well, I can feel reasonably confident that quarter-after-quarter, we're going to improve as we've done Q2 to Q3, it's going to be Q3 to Q4, and we're going to keep going that path as well in 2023, heading towards this double digit that I mentioned, so in the second half -- sometime in the second half of '23.

Our next question is from the line of Shlomo Rosenbaum with Stifel.

Hey Christophe, the volume growth is 1% across the Company, which is I would consider that a little bit low for coming -- still comping off of COVID comps, and still potential for some opening. I was wondering if you could break out the volume growth along the different segments? And how much of that had to do with the inventory stuff going on in healthcare that you have to go through? And maybe just give us a little bit of color on that. And then, I'll have a follow-up.

The biggest element on volume evolution is the year-on-year comparison. If you compare, which is something that we usually don't talk too openly, but versus 2019, which was kind of a stable base pre-COVID influence over the past three years, it's very steady. So the volume trends that we have right now in most of our businesses are continuing the same way as they did in Q2, in Q3 and probably will as well in Q4 with that impact from Europe, as I've mentioned before as well. And to your point of the recovery in institutional, well, the recovery has kind of plateaued on the market in here. So, the number of restaurants or hotels that are available as well out there, so is remaining. So quite flat since the beginning of this year as well. I mentioned early on as well, so the traffic of CD people in restaurants is down almost 30% versus 2019. So, we're basically in that industry in a steady state where there is not recovery. If you see sales going up from our customers, it’s mostly driven by pricing, which has been a big deal, obviously, for them, which means that for us, we need to keep doing two things. The first one is to keep on offense. It's new business. It's penetration. It's innovation, especially with customers needed solutions in terms of reducing the total operating cost and improving as well their quality. And second and last point is the market has changed when I look at where we are today, where are we going to be in 2023, the market of hotels and restaurants especially in the U.S. and in Europe. And for that, we will have to as well over the months to come. And I feel confident that the team is going to do it the right way. But the world we live in now is probably the world that we're going to have in the years to come.

And then the next one maybe is for Scott. Just some of the below-the-line items and how to expect -- or what to expect, I'm sorry. Should we expect any other income kind of after 3Q more of a normalized pension income, which you've been getting somewhere around $19 million for the last three quarters. Is that fair? Or does something change with the change in the stock markets? And then you had a $10 million sequential increase in interest expense. Do you feel like -- from where you are right now, this is a relatively -- it should be relatively close to this, oare you assuming that the interest expense is going to continue to step up a lot?

Yes. I guess I'll first talk on the pension. So certainly I would expect the sort of other income to be pretty similar to Q3 to Q4. But as we go into next year, as you think about the impact on rates, there will be increasing headwinds on pensions as we go into 2023. It's too early to sort of talk specifics, but we'll expect that pension expense to increase. And then, in addition, as we talk to just interest expense, with about, call it, a quarter of our debt being a variable rate. And just given where rate hikes have continued to climb, I would expect that to continue to be a headwind. It will increase in Q4 and similar to pension be a bigger headwind next year.

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

I was hoping that you could talk in a little more general terms about the industrial business. And if you think about recessionary conditions, whether you're talking specifically about Europe or about a broader global slowdown, it seems like some of your markets hold up better than others within industrial. Maybe talk a little bit about some of the pockets where you're seeing some weaker or concerning demand trends as you look into Q4? And what are some of the areas that are holding up better within the industrial business?

Yes. Mike, industrial has been a great story for many, many years. And when we say industrial, it's mostly driven by water, which is becoming something that's even more essential for our customers. So going forward, because of water scarcity, but most importantly because water drives energy consumption which drives cost and which drives as well to the carbon footprint. When I look across the various segments in Industrial, think about it, water is up 14%. F&B is up 40%, downstream is up 22%, and paper is up 19%. So, it's very healthy, very steady, very strong that we have in that whole group. And it's driven by, okay, market that likes what we're doing, which is ultimately driving new business. It's a business that's very strong at innovation. It's a business that's strong in digital technology as well. And that's why pricing is so good as well with pricing that's been up 15% in the third quarter, and we had 12% in the second. And we know that that business, when you look at the margins as well hear have improved dramatically from the second to the third or the margin pressure I should rather say, 340 basis points in the second quarter, down only 130 in the third quarter as well. And we know when industrial gets in the right momentum in terms of pricing and inflation eases, we know that great things happen, both on a margin and earnings perspective as well. So, yes, as mentioned before, to Jeff, some softening that we're feeling in some of the industries, petrochem being one of them for the reasons mentioned as well early on, which we mitigate with new business, with penetration and innovation. So, so far so good, business let’s see what happens in the months and quarters to come.

All right. And then, in terms of the cost program, I was hoping you could give a little bit more detail on maybe the timing of those, the $80 million of benefits, what segments should see the greatest proportion of benefits. And I guess what are the cash costs associated with that $80 million in savings? Thank you.

So, it's all in Europe, as you said, I've been leading that region, years back, leading to turn around over there, so very familiar with that story. And I'm really proud with what the team has done. You maybe remember or not that 10 years ago we had a large business over there that was not growing and that was not making money. Other than that, it was a great place to be. Well when I look at today, well over the last 5, 10 years our growth has been 4% from a CAGR perspective. Our OI has grown double digit over that time as well. And we've moved from close to nothing in terms of profitability to north of 10% in 2021, as well. So a great story that we've had in Europe. I want to make absolutely sure that we not only mitigate the short-term, but most importantly what we are doing is helping us for the long term that Europe can stay on that successful journey. So to your question on where we are going to work the most, it's going to start with supply, security. This is a big deal for our customers. So streamlining our network, making sure that we can have the best cost of delivered product in Europe. So it's going to be the first priority. The second one will be our structural cost as well in our SG&A leveraging as well, so digital automation. Third will be in regional G&A as well leveraging all the work that we have done with the backbone SAP infrastructure over the past few years as well. So, it's really kind of doing things we would have done no matter what for the long-term, but really accelerating these activities in order to get even more on the short term. We would have done it in a more organic fashion in the years to come. And I've decided to do that in the months to come, which is generating so this stream program as we've announced. [Operator Instructions]

Our next question is from the line of Laurence Alexander with Jefferies.

It's Dan Rizzo on for Laurence. Just piggybacking on what was just said about the cost reduction program. I was wondering if there are other variable costs that you could temporarily take out if things were to get significantly worse in Europe? If there's something you can do there?

We will. Absolutely. So, I've experienced Europe for half of my life. So very familiar with the Europe situation. It's quite extreme with what's happening right now with the war on the Eastern front. It's having an impact on demand. It's having an impact on supply, especially for industrial businesses. And it's having an impact on cost, as we know, as I mentioned as well in my open. So, I may be in the camp of preparing for a pretty tough winter in Europe. I know many people are saying, it's pretty mild right now. We're just early November. Things can change quite a bit in the months to come. And yes, we're thinking about some extreme scenarios as well, and that includes all I've talked about before and, for sure, all short-term measures that we can take. But everything we're doing in Europe and everything we will do is ultimately so leading to better performance, not only short term, but most importantly, long term because that's an important region for us.

And then, if we think about the North America or the Rest of the World, so things are pretty okay right now, but assuming that as everybody is expecting that there is some sort of recession in the second half of next year. Are you targeting or setting up cost programs that could be implemented there? Obviously, it seems like a much more efficient and better margin region or elsewhere, but I was wondering if there's things there you're looking at if things get markedly worse here in the U.S.?

It could be, but that's all a question of timing. We will not do things that we wouldn't have done over the time. Think about digital automation. Think about ERP implementation. Think about the supply network as well. We have clear plans in order to continuously improve our productivity over the next few years if things turn worse. To your point before, we would accelerate them, and that could lead to some restructuring, but it's really because we would be accelerating our plans we had all along.

The next question is from the line of Andy Wittmann with Robert W. Baird.

I guess I just wanted to understand a little bit more about the pricing and the expectations you have for pricing because it seems like a really important variable as we head into next year. With the cost side seemingly evening out, certainly have a little bit of compare on the cost side than the first half. But, it sounds like the second half comparing on the cost side on our current expectations is materially worse. I guess the question that comes to mind is you're filtering through the price increases from the last quarter or two, Christophe. And you're talking about focusing more on gaining share here. Is that to say that there isn't another unusually large price increase in store for your customers sometime in the middle of the next 2 or 3 quarters to recover that? Or how should we be thinking about the next wave of price, if any?

Yes, let me be very clear. Pricing is going to strengthen, especially in the next quarter. In Q4, we're going to keep working on pricing as well in 2023. I'm going to get too much ahead of my skis here. But it's really making sure that we get the right pricing in order to rebuild our margins fully. This is the objective for the team. But as we run a commercial organization, it's kind of leading them towards what's the primary focus. The last five quarters, it's been driving price, and they've gotten over $1 billion over the last five quarters, while driving new business. So primary focused pricing, secondary focus new business. And now, we've shifted that in the third quarter, with clearly is going for offense for all the reasons that we've discussed on that call, being in Europe, the risk in the U.S. or elsewhere as well around the world to really go for new business, to really go for penetration, to really go for innovation, while we keep strengthening the pricing, and that's why I'm saying it's going to be higher in Q4 than it's been in the third quarter as well. And at the same time, making sure that we can maintain most of this pricing as well in the long run because we provide incremental customer value as well over the quarters to come, as we've always done in our history.

Got it. Could you talk a little bit about how the pricing is affecting customer retention, if at all, in any parts of the business where it's been better or worse received might be helpful information as well?

So far, it's been very good. Our customer retention hasn't changed versus pre-pricing times. But customers are always price-sensitive, and that's why we're taking time to do it really well. We can't compare obviously to a commodity company, a chemical company that's going up and down with the market. As you know, at Ecolab when we go up, we don't go down. The energy surcharge is the only variable that we'll have to manage the right way going forward. But the vast majority of our pricing is structural pricing. And we do that with customers in ways that is good for them, that we create value, which means we reduce the total operating cost that ultimately it's a good deal for them, it's a good deal for us as well, and that we can keep it going forward. But that's real work. And that's why we haven't lost customers more than we used to, pre-pricing or pre-inflation as well, and that we do it very carefully because we want to keep our customers for the long run.

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

Could you talk a little bit more about your climate intelligence offering? What kind of technology does Siemens bring to the table? How do you split value and gain share with those industrial customers towards that net zero goal?

Yes, great question. So the simplest way to explain it is we're experts at water management and water reduction and helping customers operate with less water or zero water going forward. There is the other component, which is the energy component, where Siemens is having strong expertise at it. And when we say energy, that's mostly power as well as of our industrial customers. And when we get together, well, we have both expertise, water reduction and power, energy reduction from Siemens. And by bringing our offerings together, we can help our industrial customers to get both water reduction that's leading to power reduction and power reduction that's leading as well to carbon and cost reduction as well at the same time. So, it's a joint offering, it's joint systems that we bring together, and it's digital technology as well that we connect between the two companies for the good of our customers.

And then, circling back to the Purolite expansion, how much EBITDA uplift do you expect on an annualized basis? Is it $30 million to $35 million? Is that in the ballpark?

Overall, so we haven't disclosed that for obvious reasons, but it's going to give us enough capacity for the next two-plus years that we know is going to come. So from the pipeline we have and the current demand backlog that we have right now, and we are already working as we speak on what's required for beyond those two, three years as well down the road because building plans takes some time as well. So ,it's going to be as expected for '23 or even better, and that's going to continue on the same trajectory, in 2024, and we're building the future as well for the years to come.

The next question is from the line of Kevin McCarthy with Vertical Research Partners.

Christophe, how would you compare and contrast your price cost gap by region of the world? I'm wondering where you've made the most progress and where you feel you have the most work to do?

Great question, Kevin. The best is in North America. We have the strongest team. It's one market as well, two countries, the way we define it with the U.S. and Canada. Europe is the toughest, because it's always been the toughest, complexity, a region that’s used to negotiate price as well. But with whom we have very good relationship because ultimately, our value is to help our customers reduce their total cost as well at the same time. And then, you have the rest of the world in between, with probably China being the toughest place.

And then, as a follow-up, I want to come back to your price contribution. So, you had nice acceleration to 12%. I think as a base case, you commented that should improve in the fourth quarter. Can you help us in terms of understanding the contributions from base pricing versus the surcharges, you mentioned the volatility in Europe. U.S. natural gas looks like it might actually come down sequentially. And so, I'm just trying to understand the moving parts there. I'd also be curious to hear any thoughts that you might have on diesel. We're hearing more about potential for shortages there. And do you think you're well equipped to recover that through the surcharge paradigm, if it happens?

So, starting with the last part. From a supply perspective, so we feel good about it. We practiced our resilience planning quite a while. Now from a cost perspective, of diesel or other, the fact that we have that surcharge allows us to react fairly quickly, which is very different, obviously, than structural price, which is an agreement for the long term, together with our customers. Now, in terms of structural price versus energy surcharge, as I've shared earlier, it's roughly two-thirds structural, one-third energy surcharge, but knowing as well that the structural part is growing as well, which is good. We want to make sure that as much of the pricing so it can be structured for the long term, backed by true value that we're creating for our customers as well. And it's not the perfect line between structural and energy surcharge because some customers aren't equipped to deal with an energy surcharge and the thing. So let's have that directly in my structural price, which we've accommodated for as well at the same time. But two-thirds, one third is a good proxy.

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

When we look at institutional did quite well, travel has been strong, which I am assuming also translates into hotels, restaurants, cruises, Disney, et cetera. Are you seeing some kind of a decline recently due to inflation or you haven't seen any change yet?

We haven't seen anything yet, but there's no doubt that the cost pressure is starting to impact our customers, not from us, general cost of food, of energy and especially on the labor side. And that's why what we do is becoming increasingly important for them, which is not new, you're familiar with that, Rosemarie, over the years. The harder it gets for the institutional market, the more they need us because ultimately, they can reduce their total operating cost and especially now with the labor shortages. And for us, the biggest challenge that we've had with institutional is that the travel -- the guest traffic, in general, so has been okay, but the service has gone down quite a bit. You probably experienced that going to hotels as well, where service is quite way down or you need to do your room as well to yourself. Well, that means there's consumption of our products as well, which is why it's so important for us to get new customer, new penetration, new innovation. But bottom line, the demand has stayed reasonably stable around the world and across the end markets and institutional.

Okay. That is helpful. Thanks. And I was wondering, you mentioned lithium as one area using your products. Can you give us a better feel for what from Ecolab is the lithium industry using and then where because it is mostly in Asia Pacific and not yet in the U. S. or Europe?

Yes. Lithium has been a new opportunity that we didn't have on our radar screen, even before we acquired Purolite. And interestingly enough, that Purolite technology allows you to extract lithium from a brine, salt water. There's only one mine in the U.S., by the way, of lithium today, which is in California, which we own with our solutions as well, which is a remarkable solution for customers because it goes through that system, and you can extract lithium at pretty low cost and low energy and low waste as well at the same time. So, we didn't plan for it, but that's definitely a technology that we're planning to use around the world because lithium is kind of booming because it's driven by EV batteries from cars and other products as well. So, this is a new segment that we're getting into that we didn't plan for before we acquired Purolite.

I am a little confused. I'm not aware of any mine in California. There is a project going on in the Salton Sea, but with no lithium coming out of it. So which mine are you referring to?

I'll ask Andy to come back to you with the exact name. I don't remember exactly the name of that mine in California. That was a deal that was concluded just before we concluded with Purolite as well, and that has evolved nicely in the meantime. But it's a long-term project, which is really promising for us. We'll come back.

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

Yes. I wanted to better understand this relationship with Siemens. Is it fair to characterize this that you have your customers that you primarily support with water, they might have a completely different set of customers that are more energy-focused. And is this in a way to collaborate where you might pick new accounts on the water side, they might pick up some of your accounts on the energy side? Is that how you would characterize it? So, this is essentially a market share expansion opportunity for you?

It’s a combination of that, obviously, cross-selling, in other words. So, customers we have, they don't we bring into our customers and the other way around as well so for them. But at the same time, it's developing some joint solutions that are adding value for customers because they manage power in a plant, electricity in a plant, something we don't do, but we manage water in a plant. So from end to end, and both are related as well. So continuing our applications is not only good for both of us, Siemens and Ecolab, but is most importantly, so good for our customers.

And just I'm sure you've evaluated this, but do you see any risk that Siemens could become more of a competitor of yours, such as to expand more into water?

No, because this is not an expertise that they have. They're not planning to have expertise in water management, in chemistry, in service that we're providing. And we don't have the ambition either to become an electricity power expert as well for our industrial customers. So, we're in a very healthy place where we work together for the good of our customers with no risk between the two companies.

Our final question is from the line of Vincent Andrews with Morgan Stanley.

I guess just one last one for me. Just looking at working capital, I'm wondering whether you'll be kind of getting aggressive on inventory levels in the year-end? And not just because your cash flow from operations, I think, is down about $500 million year-over-year. But also because we've seen amongst a fair number of specialty chemical companies through earnings season sort of a desire to take inventories down to kind of send messages to the raw material suppliers that the raw prices need to come down as well. So, is that something that you folks will be working on?

Let me pass it to Scott.

Yes, I'll take that. Thanks for the question. As we look at both our working capital and cash conversion, as you've probably seen, the free cash flow has been very strong below last year because of the investments in working capital, both as the pricing is growing, the investments we have in AR, but also the investments in our inventory. And we're continuing to invest in inventory as we look ahead, especially as we look across Europe and just continuity to supply and making sure we can supply to customers. So we do not have specific actions to bring down inventories because for us, making sure we can supply to our customers is most important. But still expect to have very strong free cash flow conversion for the year, and we'll expect that to accelerate as we get into the fourth quarter, getting towards our historical levels around 90%.

Thank you. At this time, we've reached the end of the question-and-answer session, and I'll turn the floor back to Mr. Hedberg for closing remarks.

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

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