Greetings and welcome to the Ecolab Second Quarter 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Director of Investor Relations. Andy, you may now begin.

Thank you, and hello, everyone. And welcome to Ecolab’s second quarter conference call. With me today are Christophe Beck, Ecolab’s Chairman and CEO and Scott Kirkland, our CFO. A discussion of our results, along with our earnings release and the slides referencing the quarter results are available on Ecolab’s website at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which 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 in the Risk Factors section in our most recent Form 10-K and in our poster materials. We also refer you to the supplemental diluted earnings per share information in the release. With that, I’d like to turn the call over to Christophe Beck for his comments.

Thank you, Andy, and welcome to everyone. In Q2, our team delivered another very good quarter, building on continued strong momentum and once again making further improvements compared to the last quarter. Strong execution as well as easing inflationary pressure helped us get to the upper end of our expected Q2 earnings growth range. In an environment that remains unpredictable, our shift to offense continues to gain traction and our confidence in delivering midterm performance that’s ahead of historical average trends clearly keeps getting stronger. Organic sales growth remained strong at 9%, driven by the steady recovery of Institutional & Specialty with 13% organic growth. Pest Elimination and Industrial follow, delivering 11% and 9% organic growth, respectively. Despite softening global end market demand, overall volume trends remain steady. In other good news, volume excluding Europe improved from flat in Q1 to 1% growth in Q2. So, volume trends are improving further, too. Adjusted earnings per share grew 13%, led by strong organic operating income growth that accelerated from 19% in the first quarter to 21% in the second. Although year-on-year comparisons are getting harder, pricing remained strong at 10% as further new pricing continued to grow. Delivered product costs were 5% higher than last year, but is sequentially a bit more than expected, which is further good news. We kept working on strengthening our performance, including targeted actions in Institutional, Life Sciences and Healthcare. Institutional had another remarkable quarter as it continued its very strong recovery, focused on new business and penetration, drove share gains in units served, solutions sold and sales delivered. Growth, value pricing and productivity drove strong margin improvements, which we expect to continue in the second half. Additionally, innovation in labor automation positions Institutional as the ultimate leader in the market undergoing a foundational transformation, driven…

Thanks, Christophe. That concludes our formal remarks. As a final note, before we begin Q&A, as Christophe mentioned, we’ll be hosting our 2023 Investor Day at our Nalco Water headquarters in Naperville, Illinois on Thursday, September 14. If you’re interested in attending or have any questions, please contact my office. Operator, would you please begin the question-and-answer period?

[Operator Instructions] And our first question is from the line of Tim Mulrooney with William Blair.

Just one question for me today. You touched on this a little bit in your prepared remarks on the institutional margins, but I just wanted to dig in a little bit more. Because I noticed that your institutional margins, they were essentially flat year-over-year in the first quarter. It jumped up significantly in the second quarter, kind of showing progress to rebuilding back to those pre-pandemic margins. Can you just talk about what drove that inflection in the second quarter, why it happened now? And if you think that type of expansion is sustainable in the back half of this year? Thank you.

Thank you, Tim. Great question, because Institutional is our largest single business, as you know, in the Company, and they had a remarkable quarter in Q2, which followed a very good quarter in Q1 as well. So, I’ve been very impressed with how the team delivered once again. So, you mentioned it’s up 13% sales growth, 40% operating income growth. So, the team executed perfectly well. And what’s important is that our new model, which we announced a few years back now with focused sales and service organizations, one really focused on driving gains and the other one, servicing customers extremely well, while this new organization is working really, really well. That was the right move that we made a few years back. So, we’re gaining share with new business. This business has a new business pipeline, which has reached record highs over the past few months, and they’ve done an excellent job at executing this new business. Pricing has been very good as well, which has been driven by the total value delivered that they’re delivering for customers that need it. So, more than ever, if I look at the unit share as well in the market with the number of units that went down, we’re quite stable versus 2019, which is remarkable. Penetration is up as well, with programs like Ecolab Science Certified that’s driving the usage of much more solutions than in the past as well in that business. And one other point, I mentioned it so many times. So since 2019, the foot traffic in full-service restaurants, dine-in traffic is down a third. Our sales in that same segment in the U.S. is up 12%, so a massive share of gain that we’ve delivered here. So, we expect this momentum to continue in the quarters to come. And I even think that the OI dollars that we had in Q4 2019, well could be pretty close -- closely delivered in Q4 this year as well, which means that we would be, in dollar terms, very close to where we were in 2019. And well, it’s only upside from here. So, institutions did really well. It’s driven by fundamentals of new business, of pricing, of productivity, of customer service, and I like a lot where we are and even more where we’re going.

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

So, pretty solid gross margin expansion in the quarter, and thanks for providing color on the gross margin expansion for the back half of the year as well. I was wondering if it’s possible to quantify what the delivered product cost was in the quarter. And there was obviously a comment on the delivered product cost to ease, but I was wondering if you could help quantify how we should think about those delivered product costs in the back half. Thanks.

Thank you, Ashish. I’ll pass that question to Scott, our CFO.

Yes. Hi Ashish, thanks for the question. Yes, as you said, gross margins improved nicely. It was up modestly in Q1, 20 basis points, but really saw great expansion year-over-year in Q2, up 130 basis points. As Christophe said, continue to drive new pricing as well as maintaining the pricing that we’d already achieved and had hit that peak in pricing in Q1, but continue to drive new pricing and then seeing that DPC inflation easing a bit. So, as you said with that, is that easing inflation on DPC as well as the new pricing is what is going to help drive continued margin expansions in that 150 to 200 basis points year-over-year. So, we expect DPC to continue to be up year-on-year, just at a smaller rate as we see in the second half of the year. So, as we said, up 9% in Q1, 5% in Q2 and probably low-single-digits in the second half.

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

I wanted to go back to the strength in the institutional margin for a minute. Just, have you -- can you provide us kind of where you’re at on the cost-saving program? I’m just trying to gauge how much of the margin expansion is a function of price versus volume versus the actual -- the cost initiatives that you guys have kind of started to talk to, but not clear where you’re at in that process? Thanks.

I’ll pass that question as well to Scott, but before I do so, the two main drivers, institutional of volume/new business and the pricing that they’ve done really well, also fed by new business and the restructuring that we announced as well earlier, so is going quite well. But I’d like to have Scott provide some more details on that?

Yes, happy to do that. Yes, as Christophe said, institutional margins are doing very well. It’s really a combination of everything. As we talked about earlier this year as part of the expanded program, that expanded program had a total run rate savings of about $195 million. And we expect to realize the vast majority of that, let’s call it, 80-plus percent of it by the end of this year. We’re progressing on track for that, about that pace through the end of Q2, and that represents for the full program as well as the institutional, the I&S business.

[Operator Instructions] The next question comes from the line of John Roberts with Credit Suisse.

Thank you. Nice quarter. Can you give us a rough split of the Healthcare business between Surgical and Infection in North America? And why is Surgical so much smaller in Europe?

So in North America, it’s roughly saw half-half. And in Europe, it’s mostly Infection Prevention, which is the reason why the bifurcation that I’ve talked about is happening in North America, because in Europe, it’s a different business, almost focused on infection prevention today already.

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

Just Christophe, I’m intrigued by your comments around volume about them continuing to improve. I think a lot of companies have been a little bit cautious about some of the trends in Europe. And I mean, it’s still a relatively sizable market for you. So, what are the drivers that you see that gives you that confidence about volumes improving? And when you talk about that, is that up year-on-year, or is that sequential?

Yes, Josh. It’s year-on-year, so the improvement that we will see so in Q3 and in Q4. And in Q2, I was pleased to see that excluding Europe, our volumes went from flat to plus 1% year-on-year once again. And it’s all driven by the way we are driving the business. Because the end markets, honestly, so everywhere around the world have a tendency, so to soften, it’s not true everywhere. But for the most part, the softening quarter-after-quarter, hopefully, that’s going to change as well over time. We’re not counting on that. Just to be clear, our assumption is really that the end market trends will continue to soften in the next few quarters. How are we driving growth? It’s the old-fashioned way, by driving fundamentals. It starts with new business. This is a practice that we have perfected over years/decades, as we call it, a grow-to-win pipeline, which is our new business pipeline, is at an all-time high right now. And we need to deliver it, obviously, by executing it, so customer by customer. In some businesses, it’s quicker, like in Institutional, or it takes a bit more time in Industrial, since it’s heavy equipment that we need to install. But new business is really good. Penetration as well of new solutions within existing customers is a priority so for us because it’s the lower cost to execute, because we go to those customers anyway. This is improving as well. Innovation is also in a very good place. Our innovation pipeline is also at an all-time high. So, it’s an execution question as well. So to get that done, especially in what we call the mega markets in North America, Western Europe and in China, while we follow closely after in the other markets around the world. So, those are the big reasons. And it’s also driven by our new growth businesses, like data centers growing over 20%. Microelectronics, close to that as well. And our water business. That’s doing really well at the same time. So, it’s really focusing on the fundamentals, what we can control, because we can’t control what’s happening in the market.

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

Christophe, you are investing in the business. Any way to quantify how much more you’re investing this year than last year on either an absolute or a relative basis? Thank you.

Good question. I think that’s for our CFO as well, so he is looking forward to more questions. Last time he had half a question. So, I’m glad that we can do it in tandem today. So, Scott?

Yes. David, what I’d say is, I wouldn’t give you a specific number here. I would say we’ve continued to invest in the business not significantly different than we have in the past. As we’ve said through the last few years, we’ve continued to invest in the business, adding capacity, maintaining the team, investing in the team. So proportionately, it’s not that the big driver of what you’re seeing from the OI margin expansion, any change in that investment.

But maybe one comment I’d like to add as well, so to that, David, is that we differentiate how we invest behind our business. So just to share a little bit how we’re thinking about that as well. We call our growth engines for more investments because they grow faster. They have a higher margin as well. We have another category, which is more transforming businesses that could get better as well. They get a bit less, but they’re very focused in how we can drive our better margins. And then, you have kind of the third categories are the ones that need to become more profitable. They get less investments until they get to the right profitability margin. So, we really do that in a thoughtful manner, by business, by market, making sure we invest the best way we can.

Our next question is from the line of Jeff Zekauskas with JPMorgan.

Your SG&A costs are up 7.5%, which is about your rate of sales growth. Why is it SG&A going up at a lower rate? By contrast, your cost of goods sold sequentially is up 6%, your revenues are up 8%. So it looks like your raw materials are falling, and I take it that that’s giving you some benefit. Is that correct? And then lastly, it’s been a hot summer. So, that gives you above average or better water treatment chemical demand in the third quarter.

Great question. Thank you, Jeff. So three questions here for Scott, I guess.

Hey Jeff. Yes, I’ll touch on the SG&A. Good question. The SG&A was up a little over 7.5% year-on-year in the second quarter. What I’d tell you is the underlying productivity remains really strong. We’ve -- headcount has come down actually modestly over the last year, while the sales has increased. Our SG&A ratio was flat in Q2. But just as a reminder, we’re down about 300 basis points over the last three years. The Q2 SG&A increased. More than half of that was really driven by what we call the higher incentive compensation, and really is driven by our strong performance. So, what I would say around that as well is that on the SG&A, I would expect in the second half, the SG&A dollars to be pretty stable from what you saw in Q2. So -- which would mean it’s sort of the mid- to high-single-digits for the year. Certainly, in Q3, as you might recall, we’re going up a tougher comp in Q3 last year. But we also expect longer term to continue to drive productivities as we’re leveraging the digital investments that we’ve made over time.

So, that’s on SG&A. Maybe so an additional comment here. We’ve had that question so many times, Jeff, on have you reached the bottom in terms of SG&A ratio? The short answer is no, because of what Scott just said. All the digital technology that we’ve been implementing, plus all works to come will improve the performance of our organization. So for this year, expect our SG&A dollars are to remain kind of stable quarter-after-quarter, keeping in mind that our headcount at the same time is slightly down as well, which is driving that productivity, not because we spend less time with customers. We spend more time, but we automate most of the transactional work, if I may say. Your second question was on delivered product cost. It is easing a bit faster that we had expected, but it’s important to keep in mind, it’s still 40% up versus two years ago, pre-inflation. So obviously, that trend is a positive trend for us, and I’ll take that, obviously, to improve margins as well. But most of the work is on pricing and new pricing, which is going really well. And your last question on the summer. We are in 172 countries. So, it’s not impacting in material ways the business, the way we look at it. So, no influence of that, at least no significant one.

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

Just on the Institutional side, you have some very helpful commentary by region. I was just hoping to dive down a little bit more on the volume trends in the various geographies, obviously, specifically North America. And just what ultimately is underscoring the confidence in kind of market share gains, just given all of the volume volatility on the post-COVID era. Just any color on that, and just trying to extrapolate, where the real opportunity is heading into ‘24 and ‘25?

On Institutional, it’s been a pretty broad-based, the improvements, that’s been true in the mega markets, again, as we call them in North America, in Western Europe and in Greater China. Good progress on all 3 fronts here, which is our main focused. And then we have all the other markets, which are doing very well as well at the same time, even though they’re secondary in terms of investments and in terms of our priorities for us. The way we grow volume is really -- so in Institutional, to get even better at CTC, CTG, Circle The Customer, Circle The Globe, or in more modern way to describe it, with enterprise sale to have an exclusive or as close to exclusive partnerships with our global customers. A program like Ecolab Science Certified, which is mostly focused on North America today, well, helps the customer secure their guests, improve their performance and improve as well guest satisfaction at the same time when they use all our products, as well at the same time. Many of our customers are franchised organizations, which means leveraging what we do is helping deliver the quality standards that they want, that they define at the central level anywhere around the world. It’s only us who ultimately can deliver that as well. And last but not least, it’s a solution to improve labor automation. Institutional customers have had very good years in terms of margins the last two years because they’ve managed to have higher prices and lower cost, initially because of the labor shortage and ultimately have noticed that it was a good way to improve their margins. And our innovation is focused on helping them keep those better margins by automating the work that used to be done by what I would call cheap labor. So, those are the main drivers so for the growth in Institutional.

The next question comes from the line of Manav Patnaik with Barclays.

Christophe, I guess, in Healthcare, apart from perhaps increased focus, I was just wondering if you could help us understand how splitting the business is going to change the growth trajectory here. Because you’ve obviously tried a few different things in Healthcare. So just wondering, I guess, is this one last attempt or does it fit in the portfolio? Just some longer-term thoughts as well would be appreciated.

Good question on Healthcare. So, we will stay serving hospitals with what we do as a company, so protecting what’s vital, reducing hospital-acquired infection remains a point of focus. The fact that our Healthcare business has not been growing and has not making money so for quite a very long time is something that I have committed to change. And I made that commitment pretty clearly a year ago. So, what we’re doing is a very thoughtful plan. We’re quarter-after-quarter, I want to make moves that are driving us to a place where it’s a business that’s growing nicely. It’s not going to be high growth, but that we get good profitability. The first move was really in Q1, to do this cost restructuring in North America and in Europe, so to get the right cost base. And that’s evolving pretty nicely. We’re on plan delivering on that front. And I wanted to make a second step, which we announced a week ago to the organization and wanted to share with you as well in the release and on that call, where we want to have those two businesses, Surgical, which is really focused on drapes protecting surgeons’ equipment and patient’s, which is very different than our Infection Prevention business, which is much more traditional Ecolab business of hygiene and disinfection, infection prevention. Well, those two businesses, we want to have them separate. They’re more focused. They’re serving two different parts as well in the hospital. And most importantly, our Infection Prevention business, which is the one with the lowest profitability, cannot afford the cost structure that we have today. On the other hand, leveraging the huge sales force that we have in Institutional in North America, well, they get immediately a much broader reach on the market because institutionally serving hospitals on the food service and hospitality side today already and at the same time, get a huge boost in terms of cost productivity. So, improving Infection Prevention business performance, kind of almost overnight, it’s going to take, obviously, so a few months to get there, but it’s kind of a sure thing. It’s in our hands, while the Surgical business, which is doing quite well and with good margins, is going to remain a focused business. So, we have those two businesses in a better place, and that’s the next step that we want to execute towards our ambition to have a good Healthcare business ultimately.

The next question comes from the line of Shlomo Rosenbaum with Stifel.

I actually want to piggyback on Manav’s question. Is the Infection Protection business going to be kind of folded into Institutional? If you’re going to be leveraging their sales and service organization, what is going to be kind of standalone on its own? And by separating these businesses, does it also make it easier, if you can’t get them to the place you want to be to kind of sell them off in bite-sized pieces?

So a lot to unpack in your question, Shlomo. So, I’m not going to comment about the future. It gives us more options, let’s put it that way. But we’ll have those two businesses. One, our Surgical business, our Drape business is going to be standalone with its own divisional structure, supply chain. So very verticalized, if I may say. The Infection Prevention business, we’re going to have the best of both worlds, because we’re going to have a division that’s focused on corporate accounts, on marketing, on innovation, R&D, really so driving that business strategically, while commercial execution is going to be done by Institutional, where you get much more reach and a much better cost structure as well at the same time. So, two focused businesses. Surgical, totally verticalized; Infection Prevention, a separate division, but leveraging Institutional as their commercial arm.

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

I wanted to dig into the Life Sciences performance in the quarter and your comments, Christophe, about how there’s some short-term disruption in that marketplace. I was hoping you could elaborate on this, perhaps address what’s the cause of the short-term disruption? Or perhaps maybe that’s related to the prior few years, with all the vaccines and COVID and other things like that, maybe we just need to come off of that period, I don’t know. And if you could just talk to the confidence that you have in the recovery. It sounded like it’s not going to be necessarily right here in the third quarter, and you said, I think maybe the comment was a few quarters. But any detail that you can give to support the return to that growth in Life Sciences, including whether that’s the legacy Life Sciences business or the newer filtration business that you’d acquired a year or so ago?

Thank you, Andy. So, Life Sciences is a great business. It’s been a great business, since we started in 2017, when we rolled the various pieces together. And the future is even better, because -- while it’s going to be the golden age of pharma, and biopharma is going to be the new way of producing drugs and vaccines going forward as it’s been demonstrated with COVID over the past few years. So, a great business that has delivered very well with a very good future. Purolite is a new element to that business, which adds drug filtration to it as well as new capabilities to filtrate any other liquid, especially saltwater in other industries, as we’ve mentioned. So the industry is a bit under pressure today. I feel pretty good with our flattish growth because if I compare it to competition, which are great companies, by the way, well, their growth is way down. So being flattish, I feel pretty good about that. It’s driven by what you mentioned. It’s kind of still the outcome of the past few years with COVID, COVID-related production inventories as well. And in an industry that is basically getting ready for the future. It’s not going to last long. It’s going to last a few quarters. So, we’re not going to see a major pickup in Q3, but I think it’s going to happen over the next few quarters. But if anything, when I look back, so a year ago, how I was looking at Life Science, how am I looking at the market and the business today where I feel really good and even better with where we’re going, which is why we’ve decided to stay on offense. Even if the market is pressured for a while, it’s not going to last forever. So, for me, making sure that we can get more new customers, that we can build capabilities, which means expertise, people on the street, people in R&D, innovation, and at the same time, some building capacity as well to produce for the future, well, it’s the best time to do it. That has an impact on the operating income margin. That’s okay, because we know that that business is kind of north of 30% on a long-term run rate basis, it’s worth doing it. So, a few quarters a bit pressured, but we’re going to get to a better place, and that business is more promising than it’s ever been. So, I feel good about Life Sciences.

Our next question is from the line of Patrick Cunningham with Citi.

So, we’re starting to see some deceleration on pricing. What can we expect from normalized pricing going forward? And specifically on the water business, you’ve highlighted the unique competitive position and customer sustainability objectives. Do you think that will translate into higher pricing power relative to historical pricing?

So, two short answers here, Patrick. The first one is the deceleration of pricing. As you mentioned it, is 100% related to year-on-year comparison. The carryover, we’ve kept 100% of it, including the energy surcharge, by the way. And on top of it, we’re expanding as well new pricing because we’ve become as well even better. We’ve always been good at pricing as an organization. Well, over the past two years, we’ve become even better because it’s been so much related to the value we’re creating for our customers or the savings in their operations in dollar. And we want to make absolutely sure that net-net, it’s a positive story for customers, which it is. So, that’s the first answer, entirely, so the slowdown entirely related to a year-on-year comparison. Carryover is stable, and pricing is expanding, which leads to the second question, pricing for the future. I don’t know, where it’s exactly going to shake out. We’ve been always within the range of 1% to 2% in the past 10 years or pre this inflationary time. Post that cycle, whenever that cycle is over, is going to be better than that. I don’t know exactly what the number is going to be, but it’s going to be north of two. That’s for sure.

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

So, it sounds as if the path to positive volumes in the back half is you’re widening the spread that Ecolab can get versus the end markets. How do you see that developing in 2024, 2025? Do you think you can keep the new wider spread or expand it further, or do you see kind of this as a bit countercyclical? And as the end markets recover, maybe Ecolab’s volume spreads sort of compresses a little bit?

We’ll see where we end up in ‘24. If I’m looking at currently, I’m pleased with the fact that we’re better than the market. The fact that we’re improving ex-Europe, as well in Q2 and that we are in positive territory is a very good sign. I like the evolution that we’re having in Europe as well. We have a great team doing very good work over there. So, Europe is going to improve as well. So, over time, new business is very strong, as mentioned earlier. So it’s really focusing on what we can control, new business, penetration, innovation, enterprise selling. Those are the old fashioned good ways of driving volume. We’ve been successful so far. As mentioned, the last two years, we focused primarily our attention on pricing and margin. We shifted our attention primarily on volume a quarter or two ago, and it’s working. And usually, those trends take a few quarters to take hold in our organization. But when we have good momentum, it remains as well. So, I feel positive about where we’re going for the second half, so for sure. And I see no reason why it shouldn’t be good for ‘24 as well.

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

Perhaps a two-part question on the price-cost spread. Christophe, on the price side, would you call out any particular areas where you’re seeing the most positive sequential momentum on price realizations and perhaps other areas where it’s more of a struggle and starting to flatten out sequentially? And on the cost side, really a similar approach or question in that, are there particular areas you would call out, where your costs are dropping fast on a sequential basis and other areas where you have stubborn increases?

Yes, Kevin, I’ll give that question to Scott. But before we get there, again, mentioning and underlining how we look at pricing. It’s really twofold. It’s, on one hand, making sure we keep the carryover, that we don’t give price back. And that’s been working really well across the board and at the same time that we can drive new pricing as well in all businesses. And that’s been working very well as well in the organization. But with that, I’ll leave it up to Scott to give us some more insights.

Yes. Hi. Thanks, Kevin. Yes, as we talk -- as Christophe said, there’s the carry-in pricing, the pricing we executed last year, which we said had peaked at the 13% in Q1, but continue to drive that new pricing. And really, the pricing across the board, as I think about it by segment, very strong pricing across I&S, Industrial, Healthcare, Life Sciences and our other segments, which is mostly passed this as you’re aware. But really strong pricing, both that we had in that the carry-in, the structural price we did last year as well as the new pricing that will continue to accelerate this year. As I think about to your other question, from a cost perspective, DPC, Industrial took the lion’s share of the cost increases over this inflationary environment over the last couple of years. So that’s where we’re going to see the biggest impact as that DPC costs have started to ease, which we talked about in Q2, which was 5% relative to the 9% last year. So as that continues to ease, we’ll likely see the biggest benefit in Industrial, just given that they took the lion’s share of the increase over the last two years.

And Kevin, I’d like to remind you is just two facts I mentioned before as well. So, we saw Industrial having reached in Q2, already the 2019 operating income margin, which is a very good sign. And I&S, so Institutional & Specialty in dollar terms, not in margins, being back to 2019 in the fourth quarter of this year as well. So, two big indications for our two major businesses that our margin recovery is really well on track, and it’s not going to stop there. It’s going to keep improving.

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

I was curious to hear an estimate from you on what fraction of your sales would you say involve equipment at your customers that either you own or that is proprietary to you that would have to be removed if a competitor were to come in and scoop up that -- that business. And with respect to competitors, are you seeing any changes in competitive dynamics out there, such as the Solenis-Diversey combination? Are you seeing anything coming out of that?

So, a few questions in here. So, to unpack, Steve, first, on the equipment question, just would like to remind you is on 95% of our sales are recurring. So it’s not equipment by definition. This is in chemistry or lease programs or digital subscriptions or sales that you get recurringly on a monthly, on a weekly basis. So the equipment components is really, really small. At the same time, since you have equipment in those customer location, well, it increases the stickiness as well of our business with our customers. Not obvious to change. So from us to someone else, especially, since equipment is not going to be at the same level of technology, need to say the least. But this is not the way we’re driving our business with our customers. We want them to stay with us, not because it’s hard to change the equipment, but because they get the best service, the best customer experience, and most importantly, that their total cost of operation is going down because they reduce their usage of natural resources, carbon and water and at the same time, as well as the labor. So, that’s the way we drive our business, 95% recurring, less than 5% equipment. And to your last question about the competitive situation, our competition is busy right now, but we take them very seriously as we’ve always taken them. And the fact that our new business generation is doing really well is a good indication that we’re kind of winning that war.

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

I’m just wondering if you can give us a little more specifics on the volume by segment. I mean, I see what you said for the total company on an ex-Europe basis, but can you tell us anything in particular about the key segments?

Yes, Vincent. So generally, the volume profile is similar in every business. I like a lot what the Institutional & Specialty is doing. As mentioned so many times during that call, they are in positive territory and are keeping accelerating. So they’re at the forefront. They had the most to recover as well at the same time, but basically, so doing really, really well. Industrial, let’s not forget that they had a lot of work to do in pricing over the past two years. And as mentioned before, being in a position to deliver similar margins in this quarter, in the second quarter than what they had in 2019 is a remarkable accomplishment. And now so shifting over the last few quarters, on the new business, what is helping improve as well the volume in Industrial. And to call out as well that Water in Industrial is -- has been positive, remains positive and has a very good story as well here. And the drag is in paper, which is mostly driven by our customers or reducing inventories, after all, the past few years, disruptions that they had. But I like the new business that we have in paper. So paper is going to improve as well, the inventory meltdown of our customers is going to improve as well over the next few quarters. So, all in, Institutional and Specialty is strong and getting stronger. Industrial improving as well, with paper becoming better over the next few quarters. And I’ve mentioned the other businesses getting better as well, as we move forward.

The next question comes from the line of Scott Schneeberger with Oppenheimer & Company.

I have one for both of you. A quick one for Scott. I’ll ask them both upfront. Scott, the -- was -- you mentioned headcount down, but SG&A pretty steady through the balance of the year on an absolute level. Is that incentive comp, which is the delta? And how should we think about that? Because you had a few challenging years. This looks like a really good year. How should we think about that in the back half and then going into next year? And Christophe, for you, I was going to ask on paper, but I also want to ask on -- in the Industrial segment. I think because you just did cover paper pretty well. But Food and Beverage, a big subsegment there. That’s been double-digit growth for, gosh, 1.5 years. Are you continuing to win a lot of new business? How does that trajectory look? And maybe if you could bear down a little bit into the submarkets: dairy, beverage and brewing food? And just give us a little bit of color of the strength you’re seeing?

I guess, Scott, you start?

Yes. Scott, I’ll start on the SG&A question. Yes, as I said, the big driver in Q2 of the SG&A increase was incentive compensation, and would expect that similar level of sort of incentive compensation headwind as you see it. Granted, it’s -- the reason for it is why we’re performing very well and rebuilding on that incentive compensation, but expect that to be the biggest piece of the SG&A year-over-year for the second half as well. But certainly, as we’ve rebuilt on the incentive compensation, we’d expect it to be less of a headwind next year. But really, more importantly, as we’ve talked about continuing to drive this SG&A ratio, which we’ve done very well over the last few years, the 300 basis points and would expect, although for this year, because of the incentive compensation, the SG&A sort of productivity or leverage will be more modest than we saw over the last few years, would expect to continue to drive that leverage in the future, especially as we’re leveraging the investments we made, the cost savings programs that we have to continue to drive great opportunity on the SG&A productivity going forward.

Then the second part of your question, I believe, difference on our F&B business, one of our largest businesses. I’m really pleased with the work that the team has done in this business, they’ve been able to work well on both growth and margin recovery. They’ve been impacted, obviously, by the inflationary costs and delivered product cost, but managed well to manage new business and the margin performance. Second, it’s a positive industry. So it’s serving consumer goods industries. You’re familiar with most of them. They’ve done quite well over the last few years, and they’re still doing well today. So, it’s a good place to be as an industry. And the third point I’ll make is that it’s one of those industries that’s very interested in what we do. It’s about food safety, which is essential for them. It’s non-negotiable, obviously, for their brands and our customers do very well with it. And at the same time, they are the most advanced companies in terms of commitment on carbon footprint, on water usage, on waste management at a lower total cost, which is exactly what we do for them. So, they are very interested in what we do. And the last point I’ll make is we have this unique position of bringing water management and food safety in one offering, which no company today can offer. We’re uniquely positioned to offer that to our customers. And we perfect that model all the time, and I like a lot where we’re heading because that’s exactly what those customers are looking for, which are the reasons why this business is doing so well.

Our next question is a follow-up from the line of John Roberts from Credit Suisse.

North American Healthcare Infection Protection is going to use the commercial organization from Institutional. Do you have any other examples within Ecolab, of sort of cross-segment collaboration like that? And will that result in any intersegment financial reporting?

So, two parts of your question, John. On one hand, we will, for the time being, still keep that reporting consistent with what we’ve done for now. I can’t speak for the longer term. But for now, I want to keep that consistency to keep the clarity. I made a commitment to you that we will improve the Healthcare business. I truly want to show the improvements that we’re making. It’s not by folding it in something else that we’re going to improve it. So, we’re going to remain consistent and transparent. Now, the second part of your question on Institutional being used by other businesses. The best example I can provide you is for QSR, so the Quick Serve Restaurants, McDonald’s, Burger King, Wendy’s and so on, are always more using dish machine in order to automate the labor they have in their restaurant. As you know, the QSR is a separate business, and it’s been true for 30 years. It’s not exactly a new thing. In here, well, the Institutional team is the one that’s serving those dish machines as well. It works really well because we get the reach, because we have Institutional everywhere in the country, and they get the cost productivity because of the critical mass and density that Institutional is having. So, what Institutional is doing for QSR is kind of similar than what we’re looking to do for Healthcare as well. So, it’s a model that we’ve practiced in the past already.

Mr. Hedberg, there are no further questions at this time, I’d like to turn the floor back to you for closing remarks.

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

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may now disconnect your lines at this time. Thank you.