Q1 2026 Earnings Call Transcript

Thank you, everyone, for joining the Ecolab's First Quarter 2026 Earnings Release Call. [Operator Instructions] As a reminder, today's conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations. Thank you, Andy. You may now begin.

Thank you. Hello, everyone, and welcome to Ecolab's first 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 under the Risk Factors section in our most recent Form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release.

With that, I'd like to turn the call over to Christophe Beck for his comments.

Thank you so much, Andy, and welcome to everyone joining us today. We had a great quarter with accelerating momentum across our portfolio. And I know oil prices, energy and supply are top of mind for most, it's not for me. In 2022, commodities cost was up 50% and our margins for cycle went further up.

Today, commodities cost is up 9%, and we have all the tools to address this within 1 quarter, done the right way for our customers. As I sit here today, I feel very good about the year and how we're managing a complex environment, and I feel even better about where we're going next. What matters most for me today is to keep the organization focused on growth, to supply our customers seamlessly anywhere around the world and to support our teams, especially those operating in the Middle East. In a complex environment, our teams are staying very close to customers and supporting their operations without any single disruption because what we do is almost always mission-critical to them.

And when something is mission-critical to our customers, it becomes mission-critical to us, too. That means supplying reliably, solving problems quickly and delivering the outcomes they count on, and it's working. We would never ever let the customer down. That commitment is what drives the consistency and the strength you see in our results.

Now turning to the first quarter. We delivered once again a very strong quarter with adjusted diluted EPS growth of 13%, right in the middle of our range. Momentum strengthened across the business as organic sales grew 4%, driven by continued strong value pricing of 3% and volume growth that accelerated to 1%. We also expanded operating income margins reflecting the disciplined execution across our global portfolio and the strength of our One Ecolab approach, which brings together service, expertise and breakthrough technology at scale.

Momentum continued to strengthen across the portfolio, led by our growth engines, which, by the way, have close to no exposure to energy costs. Global High-Tech and digital both grew more than 20%, driven by strong demand tied to digital adoption and the ongoing AI build-out. Life Sciences accelerated to 11% growth, led by bioprocessing where sales more than doubled. We have been investing in talent, capabilities, capacity and breakthrough innovation in this high-growth, high-margin business for quite some time.

And today, these efforts are clearly paying off, and we're just getting started. We expect Life Sciences growth to continue its double-digit momentum and operating income margins to expand toward our 30% target over the next few years. And finally, Pest Elimination delivered a strong quarter with 7% growth, reflecting strong share gains from our One Ecolab growth initiative and naturally, our new Pest Intelligence offering. Our core portfolio also performed very well.

Institutional strengthened with solid growth across restaurant and lodging customers more than offsetting somewhat softer market trends. Specialty gained share with 9% growth driven by innovation that helps customers optimize costs. Food & Beverage outperformed its end markets again. Growing 5%, supported by strong execution of our One Ecolab approach and Light Water delivered steady growth, too.

We also progress in smaller parts of the portfolio that have been a bit under pressure. Collectively, the performance in Paper and Heavy Water stabilized as we supported them with new business and innovation. Overall, our growth engines are accelerating. Our core performance is strong and business that have been under pressure are turning the corner.

Together, this continues to shift our portfolio towards higher-margin, higher-growth end markets well aligned with our long-term strategy. We also delivered solid operating income margin expansion this quarter. Underlying gross margin was steady as strong value pricing offset commodity cost inflation. Reported gross margin was slightly lower due to a short-term impact from recent M&A and higher commodity cost inflation.

However, the M&A impact was favorable to our SG&A ratio and as a result, largely neutral to our OI margin. Underlying SG&A productivity improved meaningfully as we continue to scale our unique digital and agency capabilities, resulting in strong SG&A leverage year-over-year. As a result, organic operating income margin expanded by 70 basis points to 16.8%. We expect OI margin expansion to improve in the second half of the year as pricing accelerates, and we remain very confident in delivering on our 20% OI margin target by '27. Looking ahead, the operating environment remains dynamic, but we are ready.

We remain focused on growth opportunities while we keep managing a complex global environment. The conflict in the Middle East is one example. It has driven sharply higher global energy costs, creating additional pressure across supply chains. And in a moment like this, customers turn to us as their partner of choice to ensure secure supply, exceptional service and solutions that help reduce operating costs.

We take decisive actions to absorb cost pressures wherever we can. However, the magnitude of energy cost increases requires additional action to ensure reliable supply, which is why we quickly implemented an energy surcharge. This is an approach we've used successfully before, focused on delivering incremental total value for customers that exceeds the total price increase. We know it works for our customers, and we know it works for us.

As a result, the second quarter will be a short transition period. Commodity costs are expected to increase high single digits starting in the second quarter and we expect those costs to remain high through the end of the year. Surcharge benefits will build through the quarter following implementation on April 1. With this, higher commodity costs will impact second quarter EPS growth by a few percentage points. However, underlying performance remains on track and within the targeted 12% to 15% range.

Importantly, we expect to already fully offset the dollar impact from higher commodity costs as we exit the second quarter as pricing continues to accelerate and volumes continue to grow. We expect organic sales to increase 6% to 7% in the second half of the year, helping to stabilize our gross margin during that period. And that's net of Ovivo. Ex Ovivo, gross margins would be up 70 to 80 basis points in the second half.

In other words, we will be fully offsetting the significant rise in commodity costs and its impact on earnings and margins in just a few quarters. As a result, we expect EPS growth to strengthen in Q3 and Q4, resulting in unchanged full year expectations. We, therefore, continue to anticipate adjusted diluted EPS growth of 12% to 15% this year, excluding short-term impact from the pending CoolIT acquisition. As discussed earlier, CoolIT financing and noncash amortization are expected to have a short-term impact on adjusted EPS in the second half of the year.

Following the close, the impact is expected to reduce quarterly EPS by approximately $0.20. Importantly, underlying EPS growth remains unchanged. Beyond the short-term impact this year, we expect EPS growth, including CoolIT to accelerate back into the 12% to 15% range as contributions from this high-growth, high-margin acquisition accelerate and amortization from the Nalco acquisition rolls up. What's even better, the impact of our growth engines on Ecolab's global performance is accelerating as we scale down. This is especially true for global high-tech, where AI is driving significant demand for circular water management and high-performance cooling.

By bringing CoolIT and Ovivo together with our global high-tech water business, we're building a $1.5 billion powerhouse that will help fuel Ecolab's next phase of growth and margin expansion. As AI accelerates the build-out of global digital infrastructure, customers are prioritizing uptime, cooling performance and reliable water management while driving massive increases in compute power with lower energy use and net near zero water footprint. Our circular water solutions help deliver exactly that from ultra-pure water to produce the most advanced chips to 3D TRASAR connected water to support power generation and now direct-to-chip cooling to cooler chips.

Ovivo expands our ultra-pure water and end-to-end microelectronics offering in a business expected to grow at mid-teens rate this year, supported by a strong pipeline tied to fab expansions and increasing water circularity needs. Our pending acquisition of CoolIT builds on this momentum, adding a scaled direct-to-chip liquid cooling platform and positioning Global Hi-Tech with an integrated service-led cooling solution for high-density AI data centers. And here's more good news. CoolIT has shared with us that they are off to a very strong start in 2026, with first quarter sales growing well ahead of the 30% plus we discussed on the acquisition call as demand for the leading liquid cooling technologies continues to rapidly accelerate.

Together, these two businesses have the potential to add a couple of points of high-margin organic sales growth to Ecolab's total growth as they scale and capture more of this huge and fast-growing high-tech market. In closing, we delivered a strong quarter with accelerating top line momentum, continued margin expansion and double-digit EPS growth in a complex environment. Our near-term outlook is strong and consistent. Growth momentum continues to build.

Our portfolio is shifting towards higher-margin, higher-growth markets and much less exposed to energy costs, and our team is executing at a very high level. We're well positioned to deliver another year of strong performance in 2026, and we remain confident in the long-term trajectory we built in. So thank you for your continued trust and your investment in Ecolab. I'll now turn it back to Andy for Q&A.

Thanks, Christophe. That 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 Tim Mulrooney with William Blair.

This is Sam Kusswurm on for Tim. In your outlook, I think you shared your expected gross margins to stabilize in the second half, which is quicker than I think some investors may have been expecting. I imagine that's because of the decision to implement your surcharge pricing pretty quickly when this conflict started. But can you help us understand how this fits into your goal of reaching a 20% OI margin in 2027, including with the impact that the CoolIT system acquisition will have?

Thank you, Sam. As mentioned before, I know most of you have these energy costs, oil prices top of mind. And for me, that's not the case because we've been here before, and we've learned to master this very well. As a reminder, so commodities cost in '22 was up 50%.

And as you remember, margins went further up post cycle. Here, we're talking 9% up as we see it in Q2, and we're expecting to stay high until the end of the year, at least. I'm expecting that 6 to 12 months. So we're expecting in Q2 to get the dollars back as we exit Q2. And then as you said, to get gross margin to stabilize in the second half, including Ovivo.

And if you exclude Ovivo, as mentioned, gross margin would be up 70 to 80 basis points, which is our traditional run rate, which is, as mentioned, in line with our model. So OI margin will be even better because SG&A is going to keep improving as well during that time. So when I'm looking at the math as well of pricing and DPC and commodity cost, well, basically, as you know, 30% of our DPC is roughly impacted by energy cost, while growing 9%, if that's the gross impact of inflation out there, while it's 2.5% that we need to compensate, and that's why a 5% to 6% pricing in the second half brings us in a place where margins are stabilized at the minimum.

And that's obviously including Ovivo as well. So underlying, so we improve even further. But as mentioned before, so my priority is making sure that the organization will stay focused on growth, which means affecting our core businesses and building our new growth engines around high-tech, life science, Pest Intelligence and digital, which today or tomorrow with CoolIT will represent 20% plus of our company, which is really good news because it's high-growth businesses in very natural growth industries, high margins and on a side note that have low to no dependency on energy cost and supply as well.

So if I put it all together, a second half that's going to be stable to good in gross margin, SG&A, that's going to be favorable. So it means a stronger OI and EPS delivery. If I look at '27, including CoolIT, including as well the roll-off of the Nalco acquisition, where we end up, that's my objective. So for '27, it's very early, obviously, so to talk about a year from now.

Well, I think that we have a real good chance to be within our 5% to 7% top line growth and for sure, to get to the 12% to 15% earnings per share growth in a pretty solid way.

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

This is Ronan Kennedy on for Manav. Christophe, could you please help us understand the base macro scenario embedded in the guide? Does it assume broadly stable demand environment with modest improvement? Or does it contemplate an already cautious consumer posture and customer posture rather, given the higher energy costs, geopolitical certainty, et cetera?

And given the backdrop and your comments regarding not necessarily having the higher energy costs and oil prices top of mind, is there macro sensitivity? Or is it just a function of your internal execution levers like the pricing, productivity and mix?

It's 90% execution we live on the same planet as everybody else, obviously here. But that's why our assumptions, I think, are pretty conservative with this 9% commodity inflation in the second quarter and expecting it's going to stay until the end of the year and probably into next year as well at the same time. From a demand perspective, we're expecting this 1% in the second half. Q2 is always a little bit harder to define in details as it's a transition quarter as we're here.

But I look at the second half, I feel good about the 1% growth. This is our assumption. This is not my plan. We're going to accelerate, obviously, our volume growth and pricing in that range of 5% to 6%, as I mentioned before.

So you end up with 6% to 7% top line growth for the second half. So that's assumption for pricing, that's the assumption, 9% on commodity cost as well and kind of this 1% volume, which means that there might be some pluses and minuses in terms of demand around the world. But for me, controlling what we can control, the fact that our growth engines are doing really well. Collectively, they're growing 12% at high margins.

Our new business is at record level as well. I feel really good about that. Our core business is in a very strong and steady growth performance, as you've seen. And our underperformers, well are stabilizing the paper and heavy industries as well.

So you bring it all together, I think that between our assumption and controlling what we can control by focusing on growth, managing performance at the same time, well, we end up in a place where the second half is a little bit better than we even thought a few months ago. So feel good about where we're going here.

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

So very strong growth, obviously, in high-tech, 20% plus. You talked about CoolIT also growing really above that 30% growth in 1Q. I was wondering if you could also talk about Ovivo, how that's tracking compared to your expectation? If you could talk about the cross-sell opportunities of Ovivo with your core offerings in hi-tech and also as you're thinking about cross-selling once the CoolIT acquisition closes?

Thank you, Ashish. So Global Hi-Tech is going to become most probably our strongest growth engine in the near to long-term future. And together with life science, I think that we have two amazing growth engines for the future of our company, really focused on industries that are growth industries, high-margin industries and very little depending on any energy impact as well at the same time. So kind of really a combination of sweet spots that I really like.

So on high tech, as mentioned, you bring everything together, our legacy business, Ovivo, CoolIT, you get to a business of $1.5 billion that's growing 20%, 25% or more at high margin as well at the same time. We're exactly at the place we wanted to be strategically. We wanted to be the partners of the industry to help them produce better outcome chips or data compute, obviously, with low to no water usage, which is a big issue for most of those industries and socially as well around fabs or data centers. This is exactly what we're doing with Ovivo that's helping in microelectronics will move from 5% water recycling to north of 95%.

So it's absolutely game-changing for fabs. And keep in mind, so by 2030, 10 new fabs are going to be opened. That's roughly a month. And Ovivo is the most advanced technology to recycle water at ultra-pure level.

And something that's really interesting with Ovivo that we've discovered is that the quality of the ultra-pure water is having a direct impact on the yield of the chips manufacturing, which is game changing for the microelectronics industry. So great for them in terms of performance, cheap manufacturing, quality of the chip and yields and at the same time, reducing by 95% the net water usage. On the other hand, CoolIT, well, you're all familiar with all the app that's happening around data center on water impact. Well, with our end-to-end technology that we're going to bring to the market, well, data centers are going to have the water footprint of a car wash in one of the largest in the country in Milwaukee.

Well, the humans in the data center use more water than the data center itself, just to showcase a little bit of the power of that technology. So all in all, it's the first time in my career actually that I see on both fronts, customers coming to us because they know there's not enough capacity to supply everyone, and we have the two best technologies for microelectronics and data centers out there and customers want to jump the queue in order to be able on their side, obviously, to gain share in their own respective industry. So CoolIT, as mentioned, first quarter of the year, way north of the 30% that we were planning, which is a very good problem to have, obviously.

I think it's going to be a great story for all of us and Ovivo will be [ up ] as well in this mid-teens type of growth. It's a longer cycle, obviously, business, building pads takes more time than building data centers. But the backlog at Ovivo is way higher than what we had thought as well because of all the reasons I mentioned before. So I think that we've bet exactly on the right things that are going to pay off short and long term.

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

Maybe just shifting tack to One Ecolab. Sales growth, you called out noticeably above kind of the core. I guess can you highlight how much better it was than the core? And if you've got any ways to further accelerate the program now that you've been running on this program for a couple of years now?

Yes, John, it's been a bit less than 2 years, but it's been a very good story. So the most obvious outcomes of it are, on one hand, so Food & Beverage United, where we're bringing food safety, hygiene and water together. Well, you see the results of F&B have been very strong. So 5% growth major multibillion business in an industry that's not growing.

Consumer goods are not exactly so growing really fast at the moment. F&B United is. And we've done only North America, by the way, so far. So we're expanding around the world, and that's going to extend and expand, obviously, the impact on that very promising business.

Second is our largest customers, our top 35, as I've shared with you, our top 20 and emerging 15, those are the 35 that we focus on. They're growing quite a bit faster than the average of the company because of One Ecolab. And last but not least, through agentic technology, and we're really at the forefront of any industry in how we're using that. Well, our savings in terms of performance have been remarkable while making sure that our teams remain confident that ultimately, so we will really focus most of our attention on growth while we drive performance as well at the same time.

So early on the journey, but we see the pace picking up, which is exactly what we wanted and what we need in an environment or a global environment that's a little bit complex at the moment.

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

Christophe, on CoolIT, can you help us with the $0.20 of dilution in Q4? And what is your expectation or forecast for dilution in 2027 from CoolIT.

Yes. So thank you, David. So let me pass it to Scott. And by the way, it's $0.20 per quarter in the second half, as we've described that as well in the release and talked about during the acquisition call as well, and it's going to neutralize in '27. But let me pass it to Scott, and I can add any comment on to that.

Yes. David, as we talked about a month ago when we had the CoolIT call and as Christophe talked about, is that the $0.20 per quarter this year, again, because the close date, we don't know that exactly yet. So I want to make sure you understand what it is by quarter depending on the close. But as we've talked about a month ago, first of all, excluding CoolIT this year, we're going to deliver the 12%, 15%, as Christophe talked about before.

And then this is the $0.20 reduction this year. But as we think about to 2027, all with CoolIT, including the amortization, but the net impact, the roll-off of the Nalco and amortization really offsets the noncash amortization from CoolIT. So that's why we feel very good next year of staying in that 12% to 15% range from an EPS growth perspective.

Which adds as well to it to the top line, which is why we did those two investments, by the way, so on Ovivo and CoolIT, both going better than we thought, while it's adding a couple of points on the top line as well. So it's acceleration on the top line, aiming at this 5% to 7% for the overall company and strengthening the 12% to 15% earnings per share growth as well. So as we enter next year, these are the objectives that I have that we will build towards to. But so far, things are going really well on both fronts.

Our next question comes from the line of Seth Weber with BNP Paribas.

I wanted to ask about the life science business, the strength in the organic growth. Is this a step change that we've been kind of waiting for? I think, Christophe, you mentioned that double digits is kind of in the near-term foreseeable future. But can you just help us contextualize how this business is going to then react once the new capacity comes online?

And what type of operating leverage should we expect to see kind of intermediate term in this business? I know you have the 30% number long term, but if you are growing double digits, how much leverage can we see on the margin side there?

Thank you, Seth. Well, the short answer is yes. This is the performance that we were looking for, that we've been building towards to. And I'm really, really pleased with what the team has done, both internally, getting the capacity, getting quality, getting our systems, getting our platforms, R&D, everything together in order to get Life Sciences to the performance we're all planning for.

So 11% in the first quarter. We've said we're building a double-digit growth business all in. So with life science, this is where we are. This is where we're going to stay.

And honestly, that's the idea, it's to grow even faster than that as well with an operating income leverage of getting close to 30%. I want to make absolutely sure that we keep investing behind that business. So short to midterm, we might be in this mid-20s type of thing as we keep building like the plant that we're going to open in the second half of the year as well, that's going to unleash even more capacity for that business. And then knowing that we get to the 30%, I have no doubt that we're going to get there because it's all impacted by investments, basically, so the performance in terms of leverage that we're getting now.

I'd like to remind you as well what I said earlier as well, our bioprocessing business, which is the core of our business, will grew north of 100% in the first quarter. This is very encouraging. It's not going to be every quarter the same like that, but the steady growth is going to be very strong in that business here. We packed for now, we'll need more capacity as well.

So for it, a good problem to have as well and with the fastest-growing business in the life science industry. So right now, and I think that we're going to stay that way with the smaller, most agile, most innovative, probably most aggressive team as well that we have in the industry, very happy with what the life science team has done. We finally where we were hoping to be.

Our next question is from the line of Chris Parkinson with Wolfe Research.

Christophe, obviously, there's a lot to go on in terms of raw materials over the next 2 quarters. But in terms of your '27 CMD margin targets, it seems like you're actually well ahead in certain cases, [ flash ] in line. But I'd love it if you could kind of walk us through the intermediate to longer-term puts and takes of those targets and specifically how you're thinking about any newer dynamics across institutional markets as well as kind of the impending ramp of Life Sciences as well.

Thank you, Chris. I feel really good with where we're heading. But let me have Scott answer that question first, and I'll build on it.

Yes. Thanks, Chris. As Christophe said, we're very confident in the margin expansion we're delivering and the path to 20%. I mean, as you probably know, over the last few years, we've delivered north of 500 basis points of OI margin expansion and feel very good about delivering the 19% this year.

So that's 100 basis points year-on-year. And then there's 100 basis points left to get to the 20% next year, which we feel very good about. And as Christophe said, the surcharge is going well, and so that Q2 will be a transition quarter, but feel very good about the second half gross margin, as you talked about. And in addition, as part of that driver of that confidence, we talked about that business mix where this higher growth, higher-margin businesses, GHT, Life Sciences, pest, digital are also supporting that confidence in that 20% by 2027, but also in our longer-term algorithm, which we talked about, that 100 to 150 basis points through 2030.

And to build on that, as I've shared with you so many times, I'm really focused on beyond the 20%. For me, the 20% is a given next year. And when I think about it, our institutional specialty is already north of the 20%. When we talk about Life Sciences, as mentioned before, so underlying is north of 20% as well [indiscernible] before the investment that we're making that you're seeing, it's getting north of 20% as well.

Pest Elimination is north of 20% as well at the same time. And most of water is as well at the same time. So we know exactly how to get north of 20%. For me, it's just said what's the next milestones that we want to get I'll share with you as soon as I have clear solid view on that, but it's going to be quite a bit north of the 20%.

And when you think about Ovivo and CoolIT joining us, that's on top of it, obviously, with businesses that are growing really fast at very good margins. So I feel really good about the 20%. So for next year, 90% of my focus is really on what's next post the 20% to make sure that we keep growing the margins of the company.

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

I did want to talk a bit more about Global Water and the margins. And I think in the quarter, there were three dynamics going on. There was the Ovivo acquisition. You called out some raw material inflation.

I suspect that hit you pretty hard in March, which you obviously couldn't price right away for. And then the stabilization of the headwind of the softer sales in heavy water and paper. But that -- you called out an upper single-digit operating income growth decline, which I would have thought would have helped the percentage margin. So maybe you could just unpack the margin performance in Global Water, the decline and how those three different buckets contributed to it and how we should think about it over the next couple of quarters?

So I'll pass it to Scott. But generally here, so overall water was flat in terms of OI growth. So slightly 0.5%, so down in Q1. If you exclude Paper and Heavy Water, well, water has been growing top line mid-single and operating income high single digit as well [indiscernible]. So generally, water is doing really well ex Paper and heavy.

We're working on these two, Paper and heavy. But honestly, most of my focus is really on the growth part of water. The combination of both, most of water getting better through higher growth, higher-margin businesses like Global High-Tech, well, we'll get to a much, much better place very soon. And at the same time, getting the underperformance Paper and Heavy Water stabilized and improving.

We've reached the bottom for these two businesses, while the combination of both will lead to good results for the second half in water. I'm not worried in water. But Scott, anything you'd like to add?

Yes. The only thing you mentioned as well is on Ovivo and Ovivo, as we talked about for the total company, there's a geographical mix between gross margin and SG&A, but not a material impact in OI. So there's a little bit of that geography in the water business as well. But as Christophe said, we feel good about the business.

The OI growth, excluding the Paper and heavy, which we talked about, is very good, and we expect the water OI to progressively accelerate throughout the year.

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

The specialty division within INS, pretty impressive organic growth. In an environment where you see weaker foot traffic in consumer, highly sensitive to wage inflation, is most of your growth coming from deeper penetration of digital suites and productivity tools versus traditional chemical volume at this point?

Yes, Patrick, the short answer is yes. It's mostly focused on solutions that are helping them get the job done at a lower cost because they use less labor and less natural resources, energy and water. And it's working very well. When we think about the One Ecolab approach, well, we have a great example in F&B United, but we have a great example as well in specialty.

It's a business of scale, of standards at scale, of performance at scale. And the way the team is approaching those large quick-serve fast food companies is to help them understand, where is the best performance? What's the best restaurant out there in terms of guest satisfaction, cost and environmental impact and to scale those solutions across the system around the world. And those are customers that are used to that approach, that are welcoming that approach.

As you know, they're mostly franchised. So we have the opportunity with our team to influence every unit anywhere around the world the same way. And this is a huge upside for those customers, and you see it in the results. Growing 9% at the type of margins that we have in this business.

This is quite remarkable. And the last thing I'd say, it's the beauty of the Institutional and Specialty business that we have is that wherever the consumer is going to go based on the economic development, let's put it that way, well, we will capture them somewhere. It can be in a luxury restaurant. It can be in a mid-scale restaurant or it can be in a quick serve.

We're going to be there. Margins are very similar. So in a way, we're extremely well positioned wherever the consumer is going to eat because ultimately, some people are going to keep eating. And if they don't go out, well, they're going to buy from food retail, which is a business that's doing really well as well, which is explaining why Institutional and Specialty is such a steady, stable, strong business with high margin because it's a great offering for our customers to drive their own performance around the world and at the same time, so for us, we drive this huge stability and consistency because wherever the consumer goes, we will capture them.

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

Christophe, I was just hoping to get a little bit more detail on what you meant that the Paper and the basic industries are turning the corner. Is the growth getting better over there? Is it that you've just seen -- you haven't seen any more paper mills that are closing? Like what's going on with the metal side of it?

Are we going to see those businesses get to flat this year? Like just if you could give us a little bit more color because obviously, the other parts of the business are already running in the range where you want, and these are the ones that are kind of pulling you down below that range.

Yes. Because the -- I mean, the whole company, so if you exclude these two, is growing 5% plus top line. So we're in a very good place. Water is also in that range with good volume growth as well.

But any company has a few kids that need a little bit some special care because they are in older industries that are growing less fast. So the short answer is it's stabilized. We haven't been impacted by closures. anymore in the last few months, 3 to 6 months, which is something that's hard to mitigate because when they close a factory, well, there's not much you can do. Obviously, you didn't lose it to a competitor.

It's just the factory of the mill closed. So we see that it's stabilized. For me, if it gets into slightly positive in the second half, we'll be fine. This is what the team is heading towards to.

I'm feeling pretty good that we're going to get there, to be very honest. This is not where I'm spending my time. I'm spending my time on 80% of the company that's doing extremely well, building those new engines as well at the same time. I want to be absolutely growth focused, driving the performance at the leverage at the operating income side, while we manage those businesses that are a little bit more struggling.

But as I look at the second half, I feel that these two are going to get to a more positive territory. And just also mentioning so they have good margins. It's not great, but they're pretty good as well. So in a way, they're not destroying value for the company, which is the most important for me.

So 80% doing great, I mentioned north of 5% of the company. So without these two at the top line as well. But these two doing better, well, it's going to help the overall company as well in the second half and in '27.

The next question is from the line of John Roberts with Mizuho.

Is your inflation higher on raw materials? Or is it higher on your CapEx because you purchase a lot of equipment that has metals and plastics contained in it?

John, it's mostly on the commodity raw material side of things, logistics as well because logistic costs are going up, shortage of drivers, fuel costs, I mean, traditional stuff that we used to. But no, on the -- what you call CapEx, which is more technology equipment, we don't call it CapEx. Yes, there's some inflation, but there's nothing dramatic here. It's not energy related, as you know.

So nothing to see there.

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

Christophe, you said that CoolIT is growing a lot faster than 30%. Is it growing 50% or 70% or 60%? Or can you quantify that? And secondly, when you think about competing in the data center markets in direct-to-chip technology, does the competition emphasize water treatment chemistry?

Or is their direction more equipment based? And how do you see your competitive status in offering water treatment technology in the direct-to-chip area?

So Jeff, great question. Actually, the true growth, you haven't even mentioned it in all the numbers that you listed. So it's even higher than that. To be honest, it's close to the triple-digit range, which is pretty cool.

But I want to also mention, we haven't closed that acquisition. So I just want to be clear here. We need to have the regulatory approvals for that. It feels good so far that it should happen sometime in the third quarter.

That's not depending on us. But so far, exceptional performance that those guys are having. And Jeff as mentioned, I've met many customers in the meantime because we meet the same [indiscernible] obviously. They want what CoolIT does more than anything.

This is the company they want to focus on. You're familiar with a few others, obviously, out there that are doing pretty well, one starting with a V, obviously, is performing very nicely, has a very good backlog as well. This is the case as well for CoolIT. So generally, great growth trajectory.

It's not going to be a straight line to have -- forever. We'll see how that goes. But generally, I think it's going to be a very high run rate. And for me, the biggest challenge we have is to make sure we can build enough capacity behind it in order to feed the growth.

Great problem to have first time that we see really customers trying to jump the line in order to get the services from what CoolIT can provide. Then the second part of your question. So for us, as you know, I don't really care whether products are chemistry-based or technology-based or service-based or digital based. What we are offering to the data centers is ultimately a higher uptime at a lower water usage and lower or better power performance.

This is the outcome that we're promising to them. The fact that we can go from low to 0 net water usage is game changing for them. Jeff, you're familiar with the upward that's happening around data centers in our country and around the world. Well, what we do here is solving that problem.

This is a big deal for the hyperscalers. At the same time, obviously, it's enabling the more advanced chips that require the direct-to-chip cooling as well. So we're exploring various models as well here. They're all recurring models in a typical Ecolab manner.

That's the way we're developing the business as we get together with what we do in terms of services, 3D TRASAR optimization of water and power cooling, coolant as well, which is by design, a recurring product as well and all the technology that comes with it as well, as I've shared during the acquisition call. Well, every time that the new generation of chips coming, well, you change all the system for the direct-to-chip cooling, which means new cold plates, new coolant and as the power demand goes up, you change the CDUs as well at the same time. So it's inherently a recurring business.

The next question is from the line of Matthew DeYoe with Bank of America.

Thanks for kind of addressing that. I feel like one of the concerns we hear from investors all the time on the CoolIT deal is just it doesn't feel like a consumables business. But I had two to kind of backfill on this. One, the $0.20 per share dilution that you're talking about per quarter, is that math based on the 30% sales growth that you had been laying out there?

Or is that reflective of the 100% near 100% sales growth that it's currently looking at? And -- or does that matter over the near term? And then how R&D intensive do you expect CoolIT to be? Because presumably, the technology changeover here could be pretty rapid.

And cold plates and things like that, it's not really like a core competency of Ecolab. 3D TRASAR, yes, but maybe not so much this architecture and tech infrastructure stuff. So I'll leave it there.

So a few things, Matt, and then I'll pass it to Scott, if there's anything that needs to be added. So generally, so the base case is the 30% growth plus that we've talked about. So that's the base assumption. That's what we knew back then.

That's what we based our assumptions on as well. And anything that's better is going to help us, obviously. But Scott is going to add to that as well. That question on the R&D and the knowledge, I'd like just to remind you that it's a water business because direct-to-chip cooling, well, the next technology is to get towards water.

Even the coolants that we are offering to customers today are not water-based, but water-based are the best heat transfer coolant that we can imagine. Then you get all the challenges to work with water, obviously, of scaling, of fouling, of corrosion and all the things that comes together with water, especially when you work at lukewarm temperature, which are the latest NVIDIA chips, the type of temperature that they're going to have. This is a business -- this is a technology that we've been mastering for a very long time, mastering water at higher temperature, mastering heat transfer. We are the leading cooling company.

We can't forget that for 80 years. So we know thermal management really, really well. We have a lot of R&D here. And the last thing is CoolIT is super strong in R&D as well.

You add to it the 3D TRASAR technology that we're going to bring together. It's going to be CoolIT plus 3D TRASAR technology is going to become the new Ecolab offering for customers the moment that we close as well. Well, it's going to be game changing for our customers ultimately. So I feel really good in terms of R&D, in terms of expertise, it's a typical 1 plus 1 equals 3, which is exactly where we want it to be.

It's a water business, removing heat. which is what we've done basically for 80 years in both other industries and now in this new industry. Scott, do you want to add anything on the EPS impact?

Yes. One thing I would say, Matt, on the EPS is, as we've talked about, we think this is a very high-growth, high-margin business and that 30% sales growth is over the next few to several years. And obviously, in the earlier years with that averaging, it will grow faster. So certainly, as Christophe said, we like what we see, and we see growth accelerating.

But I still think that $0.20 is a good base case to have once we close per quarter. And then we'll adjust from there once we get hold of the asset.

For the second half of this year and then it gets neutralized in '27 because of the amortization that's rolling off as well at the same time. So it's almost perfect timing for that.

The next question is from the line of Mike Harrison with Seaport Research.

I was hoping that I could ask a question on the pest business. Just in terms of the digital and kind of smart connected traps that you're rolling out, can you give us a sense of what percentage of customer locations are using those new traps? Maybe just give a little more color on the timing of that rollout and when you might expect to see some margin benefits as you get better efficiency from your sales and service force with those new traps.

Thanks for that question, Mike. I love that business, and I love it even more moving towards the Pest Intelligence. We have roughly 700,000 smart devices that have been implemented so far. As you know, it's been driven by the largest retailer in the world with whom we've developed that proposition.

It's working extremely well, really resulting in close to 99% of pest-free environment with much better service because well, 95% of the time we were spending in the past checking empty traps, well, is now sort of transformed into value add, which means selling more new accounts as well out there. The plan we have, Mike, is that in the next 3 to 4 years, the whole Pest Elimination business is going to be a Pest Intelligence business. It's not going to be a straight line. We have to make sure that things would be working well.

We're going to reach probably 1 million connected devices by the end of this year and we'll keep ramping up in the next few years. That's going to have an impact on growth. It's going to have an impact on retention. It's going to have an impact on performance for our customers.

And yes, it's going to have an impact on our margins as well at the same time. And so far, it's working really, really well. We have a great team of that project and customers are really thrill about what they're experiencing.

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

As you think about the surcharges and the pricing traction you have and how that has changed over the years, is your percentage value capture across your portfolio increasing? Or is it a matter of delivering more value, but capturing the same percentage? And as you think about those dynamics, are the newer businesses where you prefer to focus your time right now, do they have a higher value capture level relative to the value create for the customer than kind of some of the older legacy Ecolab businesses?

Laurence, it's something that we perfected over the past 4, 5 years, I would say. We always do that in a way that is beneficial to our customers at the same time. And that's been a clear rule, which is why we make absolutely sure that the total value delivered to our customers is north of what we are capturing in terms of price. And not every business is created equal.

So if you go to a biotech manufacturer or you talk about Pest Intelligence in a retailer or Food & Beverage for a brewery, it's very different, and we do it in a very thoughtful manner. Over the last 5 years, we haven't lost customers doing it as well. Our margins went up. retention has remained strong as well at the same time. That's why when we talk about the surcharge, it's kind of a direction.

It's providing a framework for our teams and our customers to understand where we're going. While in some places around the world, you have more. In some places, you have a bit less in some of the businesses, it's going straight to structural pricing as well at the same time. It's working really well.

That's why I was saying early on the call as well, this is something that we master really well. I'm not worried about it. This is an execution play that our teams are doing really well, the right way, and we're going to be fine with it as well, and we're going to keep sharing with you the progress we're making here. But so far, it's going really well.

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

I guess I just wanted to maybe elaborate just to touch more on that one. It seems like the achievement of the energy surcharge is be important for that second half ramp here. And so just given that, Christophe, as you look at the total customers that you expect to approach with the energy surcharge versus how many you've approached today and are aware that this is coming, can you just help us understand how many of them or what percentage of them have been approached and are aware of this coming? And how many are still in the go-get for the balance of the year for you to achieve your ultimate target there?

Thank you, Andy. Well, it's everyone is impacted. There's no exception. We've said it's 100% of our customers in 100% of our businesses in 100% of the countries that we operate in.

And it's not an easy task. Obviously, we have a few million customers in 172 countries in 40 different industries, but it's the third time we're doing it. We started April 1. So it's a few weeks back. It's pretty new.

It's progressing very well. The mechanics are there, the systems are there. The tracking is there. I know every week where we are on pricing overall as well.

That's why I feel good with the progress that we're making here as well at the same time. And the objective that we have is to be mostly done at the end of Q2, early Q3, while we keep building as well on the structural price. And as you know, Andy, ultimately, all the surcharge is going to be converted into structural as well as quickly as we can. And in some of the businesses, it goes straight to structural as well, institutional being one of them as well.

So the mechanics are there, and that's why we can go much faster and we can do it with a much higher level of confidence as well than in the past because, well, maybe unfortunately, we've become really good at it.

Our next question is from the line of Jason Haas with Wells Fargo.

I was curious if the conflict in the Middle East has had any impact on any of your end markets in terms of like hitting your customers' confidence in any way in any segment.

So short answer is yes. But Middle East is a pretty small business. So for us, it's a few hundred million. It's critical for the customers that are there.

And that's why we take it very seriously, and we don't let any customer down over there. There's no customer location that we have left. No, we're there. We're helping them, especially in difficult time.

Some of the units were closed for all the reasons that we're familiar with. So it's immaterial, and we want to do things the right way for our customers, for our teams as well. We have practice with it as well. Our customers trust us as well to be with them as well at the same time.

And most importantly, our competition has a very hard time to supply and to serve those customers, a great opportunity for us to gain share as well at the same time. So it might impact slightly our volume growth in Q2. Honestly, I don't care because it's going to help us in the second half, ultimately as we build on new shares in the Middle East. So I look at Q2 as a transition quarter, but the way customers are reacting, they love what we're doing. The fact that we here in the toughest of times as well, it's working well.

Really proud of what the team is doing over there, and it always pays back after those phases are behind us.

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

I'm unfortunately going to continue to ask on the price cost side of things, but I just wanted to get some clarity that it's a little bit odd to me that you're talking about high single-digit raws inflation in 2Q. I mean that's coming quicker than I think I would have anticipated. And then you're not really saying that it's going to increase through the rest of the year, which most other companies are expecting higher inflation in the second half. So I'm wondering, one, what's different or unique there?

And then two, just your ability to ratchet up that surcharge automatically if inflation goes to mid-teens from the high single digits. Is that baked in? Or is that something that has to be retrieved by you?

So we buy a lot of products like over 10,000, as you know. So that's kind of the good news. It's very broad. So it's pretty stable as well so how it's increasing.

It started in February, as you know. So it's impacting the second quarter because of the inventories in between as well. So this expected impact of 8%, 9% of commodity cost in the second quarter. Some are thinking it's going to go down.

I don't. I think it's going to be flat to up to your point as well here. We're counting so for that as well. We can manage that in terms of how we buy, how we save cost and most importantly, so how we price as well at the same time.

It's impacting 1/3 of our commodities. So not everything, obviously, here. So we're pretty well insulated with it. And in the extreme case where things change completely, well, we're going to go to the next level of energy surcharge.

We did it in the past as well. We know exactly how to do it. Our customers are familiar with those discussions as well. This is not something I'm spending a lot of time on.

This is something that our teams master extremely well. They've had the opportunity to do that a few times with our customers. And don't forget that we're providing more cost savings value to our customers' operations than what we're asking them to pay in price as well. That's the reason why surcharges get into structural price, and that's the reason why customers staying with us as well at the same time.

So this is something that is not high on my priority list because I know it works. I know our customers are familiar with it, and I know that we're going to master it whatever happens in the market out there. 80% of my focus is really start to grow the company while we manage that, like many other things that are happening in the world as well at the same time. This is just one of them.

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

Christophe, I'd appreciate your updated thoughts on the subject of SG&A leverage. It looks like you were able to decrease your ratio of SG&A to sales by 130 basis points in the March quarter. Is that a reasonable trajectory to think about for the next several quarters? Maybe you could provide some updated thoughts on what you're doing productivity-wise and the effect of acquisitions on that ratio as we model the company going forward?

Yes. Thank you, Kevin. I'll pass it to Scott. But talking about what I said before that the whole price surcharge delivered product cost is not exactly high on my agenda.

SG&A leverage is not high on my agenda either. And it's not because it doesn't matter. It's because it's very well mastered. We know how to manage price DPC.

We know how to manage SG&A through technology. By the way, we're clearly at the forefront of all agentic in our organization, and it's delivering great results. So these two things, not very high on my agenda. Those ones are really well mastered while we focus on the growth of the company.

But let me have Scott give some color on the SG&A evolution here.

Yes. Thanks, Kevin. So as you said, really good productivity on SG&A in Q1, up 130 basis points. We are getting the benefit of what we're doing for the One Ecolab program as we're launching digital and AI programs.

As you noted, there is some shift, and I mentioned before, between gross margin and SG&A from M&A, primarily Ovivo. So in the first quarter, that accounted for 20 to 30 basis points, but still driving 100 basis points underlying, which is above our long-term target we've talked about in leverage being that 25 to 50 basis points. So on a full year basis, I expect that SG&A leverage to be around 100 basis points, again, including some benefit from Ovivo because of the geography between gross margin and SG&A. But still the underlying is above our long-term 25 to 50 basis points target because of, in part, the faster sales growth, but also because of the great productivity we're driving.

But over the long term, I still feel very good about that 25 to 50 basis points.

Our final question is from the line of Scott Schneeberger with Oppenheimer.

Just I'm going to touch on Light Water. You saw some solid sales in the first quarter, expecting that again in second quarter. Do you expect transportation and green energy, which were cited to remain the primary drivers going forward? And what's driving those verticals? Is it something just from a few large projects? Or is it a structural formation that's creating here?

Well, Scott, Light Water is doing quite well. Actually, transportation is one of them. What we do for them is ultimately better paint while using much less water and creating much less waste. It's a great offering that we are providing to the most advanced car manufacturers around the world.

They like the idea of better products at a lower impact and lower cost as well at the same time. This is something that we've built over the last few years. We have not been very known at it, but it's working really well with great technology. The green manufacturers as well, total different industry, obviously, but a very interesting one.

When you think about solar panels as well, it's a technology that's very close to the semiconductor type of manufacturing. This is something that we master quite well and in some places around the world. So it's growing very nicely. And the last part that's in Light Water is what we call institutional water.

Those are hotels and public buildings, office buildings, air conditioning, water management, Legionnaires' disease management, and those ones are working well. We used to be much more in that business going. So one unit by one unit. Now we're working with the large real estate companies around the world, the facility management companies as well around the world because they like this approach of a standard implemented anywhere around the world that's driving cost down and environmental impact at the same time down.

So like what I'm seeing in the Light Water business, and that's why you're seeing the performance keeping getting better, and it's going to keep improving as we move forward into the year, so which is a really good story actually here. So since it was the last question as well, so just to wrap up and recap a few things. We had a very good start of the year with strong momentum driven by what we like the most, which is record new business. That's exactly where we want to be in a world that's quite complicated.

Our new engines are doing extremely well. High-tech, life science are really sort of driving growth in dramatically good ways at high margin with very low impact from energy costs as well at the same time. And I have full confidence in our team in managing margins, both on the price of DPC equation and SG&A, as we were saying before, those are not priorities to me as the CEO, but much more so counting on the team to deliver as this team has always delivered. And that's why I feel really good that '26 is going to be a great year for the company, both at top line and at the bottom line.

And when I look a little bit ahead, well, the new engines that we have with CoolIT and Ovivo, you've heard about the performance, both top line and bottom line are putting us in a very unique leak to serve this industry, the same on life science as well. And that's why I think that '27 is going to be an even better year for us. So a strong '26 and an even stronger '27, which is what I've been committing to you for quite a while and every single year, wanted to make some progress towards that ambition. And I think that we're getting towards that as we enter the next year.

So I feel really good and even better about where we're going. So thank you so much for attending the call today, and I'll pass it back to Andy.

Yes. Great. Thanks, Christophe and Scott. That wraps up our first quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation. Hope everyone has a great rest of your day.

This concludes today's conference. You may disconnect your lines at this time. Have a wonderful day.