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DATE
Tuesday, July 29, 2025 at 5:00 p.m. ET
CALL PARTICIPANTS
Chairman, President, and Chief Executive Officer — Christophe Beck
Chief Financial Officer — Scott Kirkland
Vice President, Investor Relations — Andy Hedberg
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TAKEAWAYS
Organic Sales Growth— Organic sales grew 3% in fiscal Q2 2025 (ended June 30, 2025), driven by value pricing and core business momentum, with 85% of the business achieving 4% organic sales growth, and operating income up 18% in that group.
Value Price Increase— Increased 2% in fiscal Q2 2025, with management expecting overall pricing to approach 3% in fiscal Q3 and Q4 2025 due to the implementation of a U.S. trade surcharge.
Growth Engines Performance— Pest elimination, life sciences, global high-tech, and Ecolab Digital collectively generate nearly $3 billion in annual sales, and delivered double-digit growth in fiscal Q2 2025.
Pest Elimination Organic Sales— Organic sales growth in pest elimination accelerated to 6% in fiscal Q2 2025, with operating income margins nearing 20%, and expanding adoption of the digital pest intelligence model.
Global High-Tech Sales— Surpassed 30% sales growth in the global high-tech business, with operating income margins exceeding 20%.
Life Sciences Segment— Grew mid-single digits in fiscal Q2 2025; underlying biopharma and core pharma segments achieved double-digit growth, while water purification output was limited by full capacity.
Ecolab Digital— Achieved approximately 30% sales growth in Ecolab Digital in fiscal Q2 2025, reaching an annualized run rate of $380 million, primarily from subscription and digital hardware revenue.
Operating Income Margin— Increased by 170 basis points in operating income margin, with full-year 2025 operating income margin guidance reaffirmed at 18%, and a target of 20% operating income margin by 2027.
Gross Margin Improvement— Rose by 100 basis points, attributed to supply chain efficiency and positive net delivered product cost (DPC) dynamics, despite low-single-digit commodity inflation.
Adjusted EPS Growth Guidance— Management reaffirmed 12%-15% adjusted EPS growth for the remainder of 2025, and into 2026.
Free Cash Flow Conversion— Free cash flow in fiscal Q2 2025 was up 17% over the prior year, with full-year conversion expected around 90% of adjusted net income, below the 95% long-term target for 2025 due to higher CapEx (approximately 7%).
Leverage Ratio— Net leverage reduced to 1.7 at the end of fiscal Q2 2025, characterized as "super low" by management, with additional M&A capacity maintained.
SG&A Leverage— SG&A leverage improved by 50 basis points in fiscal Q2 2025, on track for 20-30 basis points of annual SG&A leverage in 2025, driven by 'One Ecolab' efficiency and digital initiatives.
Segment Portfolio Actions— Exits from 50 non-core businesses created a 1%-2% drag on Institutional & Specialty segment growth, but improved long-term margin structure.
Commodity Costs Outlook— Continued low- to mid-single-digit commodity cost increases are expected in the coming quarters, with offset from pricing and supply chain initiatives.
SUMMARY
Management highlighted successful double-digit earnings growth in fiscal Q2 2025, emphasizing execution around core strategies and expansion of high-margin businesses. The U.S. trade surcharge and value-pricing mechanisms are set to increase overall pricing power in fiscal Q3 and Q4 2025, while growth engine segments are accelerating, withEcolab(ECL 1.18%)'s growth engines collectively achieving double-digit growth in fiscal Q2 2025. Ecolab Digital, pest intelligence, and high-tech water solutions delivered significant growth in fiscal Q2 2025, reflecting increased demand across data centers, and biopharma. Capital allocation priorities remain consistent, with a strengthened balance sheet supporting organic investments, and a potentially active M&A pipeline focused on high-tech, life sciences, and digital technologies. Free cash flow conversion for the full year is projected at 90% due to increased CapEx, supported by ongoing process and technology efficiencies from the 'One Ecolab' integration initiative.
Chairman Beck stated, "this twelve to fifteen is not an ambition. It's a commitment, and anything that comes above will be a combination of returns and investment in our growth businesses."
Management confirmed, "we expect our total pricing to strengthen closer to 3% in the third and the fourth quarters" following U.S. trade surcharge implementation.
Supply chain and local manufacturing mitigated tariff cost impacts, with 92% of sales produced locally, and minimal net negative effect is expected from tariffs in the second half of 2025.
Major investments continue in pest intelligence, high-tech, life sciences, and digital, with management asserting higher than average anticipated returns.
The company reported a record margin within the Institutional & Specialty segment in fiscal Q2 2025, citing automation and technology as drivers of customer and internal productivity gains.
INDUSTRY GLOSSARY
DPC (Delivered Product Cost): Total cost to deliver products to customers, accounting for raw materials, supply chain, and tariff impacts, used for margin analysis.
Pest Intelligence: Digitally enabled service platform utilizing sensors, cloud analytics, and automation to provide remote pest monitoring and intervention for commercial clients.
One Ecolab: Integrated company-wide strategy to unify operations, enhance cross-selling, and pursue digital transformation across Ecolab's business segments.
Full Conference Call Transcript
Christophe Beck: Thank you so much, Andy, and welcome to everyone joining us today. The Ecolab team delivered another very strong quarter, once again very consistent with our guidance. Our team's relentless focus on execution and delivering exceptional value to customers enabled us to achieve double-digit earnings growth despite the unpredictable global operating environment. Organic sales continued to grow 3%, led by strong value pricing, solid momentum in our core business driven by our One Ecolab strategy, that's working really well and fueled by breakthrough innovation as well as steady strong performance from our growth engines. This good momentum more than overcame uneven end market demand, particularly in our paper and basic industries businesses, which represent only 15% of Ecolab's total sales.
In other words, the remaining 85% of our business grew organic sales 4% and operating income by 18%, reflecting our broad resilient business portfolio. This is a major strength of Ecolab, allowing us to deliver superior performance in good and more challenging times. Now let me spend a few minutes on our key growth drivers and talk about why I remain very confident about our future, in 2025, in 2026, and beyond. First, on value price. It continued to build in the second quarter, increasing just 2%. This growth is supported by increasing value that our technology and services bring to customers as we deliver best-in-class business outcomes, operational performance, and environmental impact.
During the second quarter, we also began implementing our trade surcharge for all customers in the United States only. Given the dynamic international trade environment, the surcharge coupled with the expertise of our world-class supply chain team enables us to reliably supply our customers while delivering value that exceeds the total price increases. With this now in place, we expect our total pricing to strengthen closer to 3% in the third and the fourth quarters. The growth in our core segments, like institutional and specialty, and global water, both continue to progress very well. In institutional and specialty, allowing us to continue to outperform the industry while overcoming the headwind created by the strategic decision to exit 50 non-core businesses.
These exits in our hospitals and retail businesses are causing a one to two percent point drag on institutional specialty second quarter growth. But they're also helping us to further enhance our focus on the most critical customers, and at the same time to further improve our long-term margin profile. So all in all, a very good story. In Global Water, performance was led by food and beverage, which accelerated to 3% organic growth by executing very well on our One Ecolab growth strategy that provides customers with a comprehensive hygiene and water offering that actually no one else can truly provide.
This strength more than offsets the softer performance in more difficult end markets in paper and basic industries as mentioned before. Excluding these businesses, global water sales growth accelerated to 4% and operating income grew double digits. Finally, Ecolab's growth engines, which include pest elimination, life sciences, global high-tech, and Ecolab Digital, continue to perform exceptionally well. Collectively, these businesses make up nearly $3 billion of Ecolab's annual sales and grew double digit in the second quarter. Pest elimination's organic sales growth accelerated to 6%, benefiting from our One Ecolab growth strategy and also the shift to our digital pest intelligence model. As expected, operating income margins increased sequentially to nearly 20%.
And as we continue to deploy pest intelligence in the next coming years, leveraging our major digital capabilities, we expect to generate steady strong sales growth and very attractive operating income margin expansion. Life sciences grew mid-single digits, led by strong double-digit growth in biopharma, as well as in core pharma and personal care. While performance in water purification was partially impacted by shorter-term limitations in production. And we are at full capacity. Also, operating income grew significantly from the strong growth in our high-margin biopharma business. We expect reported operating income margins to stay in the mid-teens as we invest further to fill this long-term high-growth business with operating income margin potential of 30%.
Also, our global high-tech business continues to grow very rapidly, with sales up over 30% and operating income margins exceeding 20%. We're just at the beginning of this incredible growth story. But it is one we will own by leveraging our vast cooling for data centers and water circularity solutions for microelectronics production. And finally, Ecolab Digital kept accelerating sales growth to nearly 30% in the second quarter, reaching an annualized run rate of $380 million driven by rapid growth in subscription revenue and digital hardware. This exceptional performance combined with value price and share gains across the businesses drove a 170 basis points increase in Ecolab's second quarter operating income margin.
While commodity costs are anticipated to keep increasing by low to mid-single digits in the second half of the year, ending 2026, we expect our operating income margin to continue to expand at steady levels due to growth in high-margin businesses, value price, share gains, and productivity improvements. In total, we continue to expect our full-year 2025 operating income margin to reach a solid 18% on our path to deliver a 20% operating income margin by 2027. And as mentioned, we will not stop there. Looking ahead, most business fundamentals seem to be trending up, which provides me with the confidence to deliver 12% to 15% adjusted EPS growth for the quarters to come in 2025 and into 2026.
As we also keep investing in our growth engines. Our experience in navigating past macro challenges has only strengthened our capabilities and agility. With our diversified portfolio, record innovation pipeline, strong growth engine, and focused execution with plenty of options and levers to deliver on our commitments in almost any environment. Our unique ability to provide innovative solutions that drive best-in-class outcomes, enhance operational performance, and conserve vital resources like water and energy for all our customers is crucial, or more crucial than ever. With a strong and resilient free cash flow and extremely strong balance sheet, and a super low leverage ratio of 1.7, we're very well positioned to capitalize on both organic and inorganic growth opportunities.
These strong foundations enhance our ability to create significant value for our customers and drive attractive returns for our shareholders. I therefore remain very confident in our ability to deliver sustained strong performance in 2025 and beyond. So thanks again for your continued trust and your investment in Ecolab. I look forward to your questions.
Andy Hedberg: Thanks, Christophe. That concludes our formal remarks. One final note before we begin Q&A. As a reminder, we'll be hosting our Investor Day on September 4 in Minnesota, where Ecolab's senior leadership team will provide an in-depth review of the company's strategy to drive strong growth and attractive margin expansion. This event will also include interactive sessions showcasing Ecolab's latest breakthrough innovation. Please contact me if you're interested in joining us. With that, operator, would you please begin the question and answer period?
Operator: Thank you. If you'd like to ask a question at this time, you may press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. I ask you to please limit yourself to one question per caller so that others will have a chance to participate. If you have additional questions, please rejoin the Q&A queue. One moment for our first question. Our first question is from the line of Tim Mulrooney with William Blair.
Please proceed with your question.
Tim Mulrooney: Christophe, Scott, good afternoon.
Christophe Beck: Good afternoon, Tim.
Tim Mulrooney: Yeah. So for my question, I wanted to ask, you know, I think some folks were thinking maybe that you would raise your guidance or maybe the low end of the guidance a little bit this quarter. So even though the second quarter came in line with expectations, I think some folks were maybe expecting a little bit more for the second half of this year. Can you just walk us through the puts and takes here? Is there maybe some conservatism being baked in here, or is there maybe something else that I'm not seeing? Thank you.
Christophe Beck: Thank you, Tim. It's actually a combination of both conservatism and at the same time, investing further in our growth businesses. 13% growth on earnings for the second quarter, guiding these to 15% for the second half and beyond, for me, this is the commitment I've made to all of you, and this is where I want to make sure that at least I deliver that. Actually, well, I really like where we are right now. So we have good momentum with, as mentioned, 85% of our business growing 4%. And the growth engines, the ones I mentioned before, that represent close to $3 billion in sales, well, they're growing double digit. So our investments in growth are really working.
Second, the macro trends, water for AI infrastructure, pure electrification for life sciences, and productivity for hospitality, and pest intelligence, well, they're all trending in our favor. It's a good thing. And our business fundamentals of new business, innovation, value price, productivity, they're all trending in a positive direction. So I'm with you. I feel good about where we are, where we're going, about the second half, and for 2026 and beyond. But as we know, the world is a bit of a complicated place, and we honestly always build some room for the unexpected. And the last few years, well, we had plenty of this, and some could call it conservatism.
For me, it's making sure I can deliver what we've promised. And secondly, we keep investing more in our growth engines to fuel this long-term momentum in life sciences, in data centers, in fabs, in pest intelligence, in Ecolab Digital. And ultimately, this will keep paying dividends in the long run for all of us. So bottom line, I think we're in a very good place. And any over-delivery that we will get in the quarters to come and years to come will be shared between returns for, I mean, incremental returns for investors and incremental investments in our growth businesses.
So all in all, I think it's a win-win for the company and for investors as well at the same time. For me, as I've mentioned, this twelve to fifteen is not an ambition. It's a commitment, and anything that comes above will be a combination of returns and investment in our growth businesses.
Operator: Our next question is from the line of Manav Patnaik with Barclays. Please proceed with your question.
Manav Patnaik: Thank you. Christophe, I just wanted to touch on pricing. I understand from a volume perspective, obviously, as you mentioned, there was an uncertain case, etcetera. Just can you help us dig through what you're hearing, what you're seeing on the pricing front? I think you know, the 2%, I believe, was supposed to be two and a half. To maybe a bit higher. If you could just talk about what we should expect in the second half with and without the search pricing that you have coming in?
Christophe Beck: Yeah. Thank you, Manav. I like it a lot, where we are on pricing. And keeping in mind, it's value pricing. We've made that commitment to customers as well that we will always deliver more value, which means cost savings in the operations than the incremental price they're paying for our kind of a value share. That's the important component of how we think about pricing in our company. So 2% in Q1, 2% in Q2, starting US trade surcharge as well in the second quarter. So far, so good, but it's always a start during the quarter. You announced it. So for Q3, Q4, I expect pricing to move closer to three.
So I don't know exactly where we're gonna land in Q3, but in Q4, it's gonna be three. Hopefully, it will be three or close to three as well, in Q3, but all trending up. And, again, backed by the value deliveries of our customers, and what's most important is that the retention of our customers, which is something that we look at very closely, is getting stronger. As well at the same time and as you've seen the volumes. Positive as well, especially strong in our growth businesses. So all in all, it's working well, and I see value price as a good revenue stream at a 100% margin for us.
And in ways that are driving savings in our customers' operations as well at the same time. So it's working really well.
Operator: Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please proceed with your question.
Ashish Sabadra: Thanks for taking my question. So just wanted to focus on the pest elimination business where we saw an improvement. Can you talk about some of the efforts around pest intelligence, how those rollouts are coming together, and how should we think about the puts and takes for growth going forward? Thanks.
Christophe Beck: Thank you, Ashish. We love that business. Pest elimination is just an unbelievable story. Which will shift towards pest intelligence over the next few years. It's not gonna take forever, but we're gonna move from pest elimination, the business that we have today, with our people going and visiting every location looking at every device at our customer's location which are millions around the world to pest intelligence where most of it is gonna be done twenty-four seven remotely with our team, ultimately. So going to the places where they can add value and not taking devices means mousetraps that are empty. We are on an unbelievable journey with that.
The huge advantage we have is that as Ecolab, well, we have massive capabilities in digital, in sensing technology, the Ecolab 3D clouds. We have all it takes to put that into practice in our elimination business. As I've shared with some of you as well the last few months, we concluded one of the major retailers here in the US, which was our pilot, making sure it was working. A technology perspective, from a model perspective, and interestingly enough, when we think about the pest-free ratio, the industry is at 92%. Today, which means 92% of the customer locations are pest-free. The average for Ecolab is 95%. Which is better.
You still have 5% of the locations that are not pest-free. And that pilot that we deployed is showing that we can deliver 98% trending to 99%. We'd never get to a 100% because nature, obviously, but 99% seems to be the right number. So great outcome. The model is working. The customer is ready with is open and ready with the financial model as well at the same time. We're moving towards second retailer as we speak. The third one is lined up as well. So for the month to come, and we'll expand as well across all our end markets. In the months and quarters to come.
I think that whole business in the next years is gonna become a full pest intelligence model with a new financial model, obviously, that's driving more growth, better margins, and most important, 99% pest-free environment for our customers. So very good story.
Operator: Our next question is from the line of John McNulty with BMO Capital Markets. Please proceed with your question.
John McNulty: Yeah. Good morning, Mark. Good afternoon. Thanks for taking my question, Christophe. You help us to think about the delivered product cost that you saw in this quarter and how you're thinking about that you go into the second half? It seems like there's kind of still a lot of moving parts around tariffs and headwinds around that, raw materials kind of some of them fading, some of them pushing higher. So can you help us think about those trends?
Christophe Beck: Yes, John. Lot of moving pieces to say the least. We've been used to that. Let me ask Scott just to start with the answer.
Scott Kirkland: Absolutely. Hi, John. Yeah. On DPC, so similar to Q1 and Q2 commodities, so the market, if you will, up low single digits, which includes the impact of tariffs in related inflation, which we're seeing. But the net DPC was slightly favorable as we've gotten efficiencies from our great supply chain team. So we expect the market, the commodity inflation, to be up at low single to mid-single digits in the quarters to come, ultimately depending on the tariff impact. But we expect to continue to do better than this with the impact from our supply chain team which we're seeing in the results of our gross margins being up 100 basis points in Q2.
Christophe Beck: So the combination of supply chain doing an amazing work to get a net DPC that's favorable and value price that's trending positively as well is obviously driving a very positive equation for our margins, which is one of the reasons why our gross went up 100 basis points in Q2.
Operator: The next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
David Begleiter: Thank you. Good afternoon. Christophe, on the U.S. surcharge, do you still expect to realize roughly half of what you announced? And are you seeing competitor support for this surcharge? And lastly, why not anything on the international side in terms of a surcharge? Thank you.
Christophe Beck: So a few questions in there, David. So first, on competitors. They've announced a trade surcharge. I'm not in their books, obviously, so I don't exactly know what they're doing. The good thing is that beginning share again, all of them, which is a good place to be. So good that they're all participating and that we're winning as well at the same time. The second, in terms of delivery, it's an imperfect science as we know, but generally working as you've heard. So from Scott, we look at tariff increase of prices by local manufacturing concentration, our optimization in supply chain, plus the trade surcharge, it's a net positive, and it's seen in our margin.
Ultimately, so the mechanics work really well for us and for our customers, which is exactly where we want to be. And the third part of your question, international, we have all it takes to get it done. It's just that today, as you know, those treaties with the economies around the world were all unilateral. So it's a tariff you get when you import or you export to the US, not when the US is exporting. So to have a market, at least we haven't seen those. The moment we see those, if there's a reciprocal action, so from any market out there, we have the mechanics. We know how to make it work.
We've used it with energy surcharge in 2022. We can use it. So far, we don't have any reasons to do it, so we will not, obviously, use it as long as the tariffs remain as they are to export to other countries.
Operator: Thank you. The next question is from the line of Chris Parkinson with Wolfe Research.
Chris Parkinson: Christophe, despite a pretty sluggish macro environment, your margins in Institutional Life Sciences seem to be moving in the right direction. And on one hand, you've been talking about price, you know, presumably productivity and portfolio rationalizations on the positives. Versus, you know, presumably a still pretty sluggish macro and perhaps a little bit of growth spend on the opposite side of it. But just, you know, in the context of the macro we're in, what did 2Q results tell you about your longer-term opportunities by segment? Thank you.
Christophe Beck: Great question, Chris. Well, what they're telling me is that it's working. Because INS has reached the highest level of margin they've ever had in their history. This team is doing unbelievable work by really focusing on what customers need the most. And it's labor automation, labor optimization, whatever the words are, they have a hard time getting talent, and the talent they're getting is at a higher cost, which, you know, is a good thing for the general environment. But not so much for the P&L of our customers. So when I look at automation solutions for our INS customers, it works for them. It helps them reduce their cost in dramatic ways.
Which means that we can get some of that value share in our value front. So it's good for us. Good for them. Same time, we also leveraging technology within INS. Really pleased with the way INS is embracing digital Ecolab platform that we've developed for the whole company, for the whole IMF. As well at the same time. So we get an improvement as well at the same time from an operating performance perspective, which is really good. And the third thing is that, because of that, better service, better outcome, better productivity for our customers, we gain share. As well at the same time. And you see the growth of INS is really good.
It's even been impacted one to two points by those exits, as I mentioned before, which were private label businesses, which didn't have much to do with our service business. By the way, when we're gaining share. And that's showing that it's working. Customers like it. So the combination of all three gaining share, driving value for our customers, and driving operational performance within INS, well, net to the highest margin in our history in INS, and it's gonna continue on that good trajectory. So for the quarters and years to come.
Operator: Our next question is from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Vincent Andrews: Thank you, and good afternoon, everyone. Wondering, Christophe, if you could speak a little bit to I believe in your prepared remarks, and please correct me if I'm wrong, you mentioned that you're maxed out on capacity in certain parts of the water business. Just wondering if you could expand on that a little bit. And likewise, in pest, it sounds like these customer trials are going extremely well.
So I'm wondering, you know, sort of what the S curve of the implementation of that new technology, your better mousetrap, so to speak, you know, what the timing and pace of that's gonna be and if there are any potential capacity constraints there that you would need to get in front of.
Christophe Beck: Yeah. So two different businesses. Obviously, it's our pest intelligence with the better mousetrap. Which are truly better mousetraps. It feels easier to do than it truly is to get that working really, really well millions of times around the world where we operate. So we test elimination and in the future. So pest intelligence. We wanted to make sure it was working. Before we go too far getting ahead of our skis not delivering the value to our customers would not be the right thing to do. Obviously, it's having one of those great retail partners, which is a reference point in the US, was exactly what we wanted to do. And it worked.
And now we're getting second, and as mentioned, so to the third one as well. I think it's gonna take a few years. It's gonna take less than five years, hopefully much less, but let's see. To shift the whole business towards pest intelligence. We have a great team with a great leadership. And customers that really love what's being done and the same time, we have digital capabilities that none of our competitors do have. So that should be all positive. Obviously, so for us. In life science, you're right. So we got some capacity limitations in our water business. So within life science, water purification, the life science business, not for the pharma business directly.
Pharma, biopharma, as mentioned, is growing double digit, very strong, very good. Really pleased to see that all the work that we've done over the past two, three years since we acquired Pure Light, ultimately, it's paying off and really looking some really good momentum most importantly, great acceptance by our customers. And in the second quarter, so we had maintenance that was planned in one of our plants in Europe that limited how much we could produce there. And that has a slight impact on our production over there. That plan, that's okay. We need to live with it. That's not much to do with demand, obviously. So kind of business as usual.
Operator: The next question comes from the line of Patrick Cunningham with Citi. Please proceed with your question.
Patrick Cunningham: Operating income growth was rather modest relative to solid pricing growth and good underlying growth there. I think you cited supply chain costs and unfavorable mix, but I think our assumption was some of these faster-growing markets had better mix.
Scott Kirkland: Yeah. Happy to do it, Patrick. As Christophe noted in his opening, basic and that water ROI growth of 6% was all due to basic and paper. If you look at the water OI growth excluding both basic and paper, the sales were up 4% and the OI was up strong double digits.
Operator: The next question is from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.
Shlomo Rosenbaum: Hi, thank you very much. If you don't mind, I'm going to ask a little bit more of a two-parter. First one is just on the organic growth. If we're kind of bouncing around at 3%, and, you know, volume is only kind of 1% here, are you still do you still have the same level of confidence on that operating margin target, especially if we don't start to see a material improvement in the volume side?
And then just wanted to touch on what you said on pest in terms of morphing the model, because we've had a couple quarters growth that were lower than what we're used to seeing in that in that business is part of the shifting the model giving you a near-term headwind to revenue growth in that business? Thank you.
Christophe Beck: Thank you, two very different questions. So on pest elimination, the short answer is yeah. The shift towards pest intelligence is not an obvious shift. It's a pretty significant shift within our organization. It's new technology. It's a new route model. It's a new financial model. It's a complicated piece. If I may say so to make it work really well. And on top of it, as you know, we had a few incidents that we had to deal with. And for unfortunately, as well, caring about our team. That's so important for us in the company. So it was kind of, behind us.
Now we keep investing on pest intelligence because it's gonna help us really lead that transformation in that industry in the US and around the world, not just in terms of now the devices, but in terms of type of technology and business model as well at the same time. So requires some investments financial investments, but resources as well at the same time. Which are people, obviously. So doing that work, generally, you feel good with your trajectory we have, on the top line in terms of model as well. So the 20% plus is gonna just strengthen with that shift in model in pest intelligence.
So generally, a very good story of those transformations are never obvious, and it's not a straight line to heaven either, but great leadership team, great team executing very well. As mentioned before, so customer is very pleased with how it's working because at the end of the day, well, it's aiming to the 99% pest-free environment that matters. Now to the first part, of your question, my confidence to get the 20% by 2027 just keeps getting stronger. If we look at, the second quarter, well, with top line growth of 3%, being able to deliver percent earnings growth and operating income margin up 170 basis points.
Obviously, it's a it's kind of a of what accelerated growth could mean. As well so for the delivery of the company. And as mentioned, so we have two businesses, and there will always be a few businesses that are not exactly in a great place at the strength of the portfolio we have as a company here, some of these paper and basic industries, well, 85% of the company is growing 4%. And 20% of our growth engine are growing double digit. As well at the same time, and that's where we invest.
So, generally, the mix of growth is gonna turn positive and that's gonna help us get closer to the 20% quicker as well at the same time. So I can't judge what's gonna happen in the outside environment. But, generally, I feel really good, about 20% by 2027.
Operator: Our next question comes from the line of John Roberts with Mizuho Securities. Please proceed with your question.
John Roberts: With the balance sheet now in great shape, how would you characterize the pipeline for inorganic growth? It's been a while since the Pure Light deal.
Christophe Beck: It's been a while, 2021. We did Pure Light. We did a few smaller acquisitions, in the meantime, which is the bread and butter of our M&A engine, by the way. And sometimes we have a few bigger ones. And you're right. We have great cash flow, great cash flow conversion, very low leverage rate ratio. It's gonna keep getting lower, obviously, time passes by. It's putting us in a great position to invest, where it makes more sense. And, John, we're gonna keep investing as we've always done. It's first in dividends. It's in our business, and we have plenty of opportunities. We talked about innovation. So on this call, it's on our customers' technology as well.
Dispensing, in dish machines, in equipment, and so on as always done. And then there is the M&A. I really like the pipeline that we have. Very focused on the three areas that have been a priority of the main. Water, especially on the high-tech side, data centers, and microelectronics, so perhaps in other words, in life science, and in digital technology. So really like the pipeline we have. The capabilities we have, at the same time, we will always remain disciplined. As well in terms of how we deploy our capital. So if we find the right thing, and as mentioned, there are a lot of right good things, out there for us.
Will move and we'll let you know, obviously. And as a lot of priority will always be buybacks as we've done in the past few years and as we're doing as well in 2025 at the same time. So don't think we could be in a better position right now. So do we have great machine generating a lot of cash, a fortress balance sheet, great opportunities in front of us, and priorities that haven't changed for a very long time.
Operator: The next question comes from the line of Jeff Stokauskas with JPMorgan. Please proceed with your question.
Jeff Stokauskas: Thanks very much. In the water business, the organic change was 2% and I think your water business grew. Maybe volumes grew one. Please correct me if I'm wrong. And your overall price for the company was, you know, 2%, but it seems that it was lower in water. So is the challenge for the second half to get better pricing in the water division? And do you need it in paper and in heavy industry where you're contracting a little bit. Is that the challenge for the second half? In pricing?
Christophe Beck: No. I don't think so. Our water business has always been pretty strong at driving value price backed by total value delivered. They've invented, actually, that concept a long time ago. So they know how to do it. They've been good at delivering it. Same time, we make absolutely sure that we get the value price when we truly get as well. So the TBD, the cost savings within our customer operation. So we're not disclosing by segment, as you know, so price and volume. But you're more right than not. So with your assumption on water, which makes me feel good, actually. And as mentioned before, so water, organic growth x paper and basic industries, well, would be full.
So it's a very good story. Scott mentioned as well. And the operating income would be up in the mid-teens as well at the same time. So a really good story. So for me, Jeff, it's really it's our focusing on what grows fast in water. It's global high-tech. Data centers, and especially so microelectronics. These two growing collectively, 30%, very good. The rest of the business is growing nicely. And we have those two businesses that are not grown. Paper and basic industries. But I think that's gonna change. At some point. Basic industries is you maybe or maybe don't know, it's it's our steel business. It's our power business. And it's our chemicals business are in there.
Well, those ones with what's happening around us, with the whole trade negotiations, I think, ultimately, are gonna turn better as well over time. And the paper business is very much related to consumer goods growth as companies are grow out there, the FMCG of that world. So those ones are gonna be okay. Never gonna be a great pros, but it's gonna be okay as well. So if I put it all together, 85% is going really well, in that water business. 50% a little bit more challenged, Margins are really good in the businesses that are growing fast. And our growth businesses keep accelerating, especially in the high-tech sector. So, generally, water will be in a good shape.
Operator: Thank you. The next question is from the line of Andy Wittmann with Baird. Great. Good afternoon and thank you for taking my question.
Andy Wittmann: I guess I wanted to ask about free cash flow. And just try to understand a little bit more about what's happening here. As I look at it on a year-over-year basis and normalize it for days, like the inventory up to a smidge. Receivables are up more than a smidge. And payable days are actually extended as well. Yet, the cash flows is down. And year to date, you're about 65 of your adjusted net income. I know you always target 95%. And so, obviously, the second half is going to have to ramp if year is gonna be a 95% year.
So I guess, Scott, maybe the question is, do you still expect it to be 95% year and maybe what happened in the first half or do you see did anything happen that's unusual in the first that we should know about that maybe has you at or slightly below plan for the year?
Christophe Beck: Hey. Thank you, Andy. I'll pass this to Scott. I hope I'm more of an expert than Andy on cash flow.
Scott Kirkland: The high-level answer is on the year. I expect to the free cash flow conversion to be right around 90%, which is our historical trend. You think about cash flow for the year, what you might not recall in Q1 is we had an unfavorable year-over-year comparison. If you look at Q2, free cash flows were actually up 17% year over year. Driven by the '1, and we have this really strong comp to last year. It was just due to the timing of cash payments. And then that 90%, as I said, we expect to deliver for the full year.
It's driven by the strong journey growth as you might also recall, I talked about CapEx will be a little bit higher this year, around 7% is why it's at 90, not maybe closer to 95%. But feel very good. About the free cash flow trajectory, but because of the Q1, the year-to-date number looks a little bit funky.
Operator: Our next question is from the line of Matthew DeWo with Bank of America. Please proceed with your question.
Matthew DeWo: Yeah. Thank you. Good afternoon. Margins in life science were pretty strong on the quarter. Can we just dive into that a little bit and maybe what's driving the expected quarter over quarter drop back towards the mid-teens from the nearly 20% on the quarter itself?
Christophe Beck: It's two things, actually, Matt. When you think about life science, are there margin growth in Q2 was especially driven because pharma, biopharma had great growth. And it has the highest margins. As well at the same time. So the mix of margins was highly positive in the second quarter. So very good story in Ethernet. To that great outcome as well at the same time. Interestingly enough in that business, it's a little bit depending on the deliveries, well that you can have. You know, that price per pound is absolutely huge. In that business. So depending on the exact timing of deliveries, might be on one quarter or the other one, which is totally fine.
There's no cyclicality in that business. Year over year, it's pretty steady, but quarter by quarter is off. You might have some timing differences related to deliveries. But what's most important is that, as I've shared so, many times, we keep investing in that business. We are the small, agile of the three players. In that industries are on the planet and wanna remain. So we keep investing. In that business. So you get mid-teens type of reported OI margin. The two underlying are closer to the mid-twenties. Out there.
So it's kind of investing the difference in capabilities, means innovation, people, R&D in the world, and capacity, and plans, well at the same time in order to really use that business and get to that leadership position that we're looking for as a business here. So it won't be a straight line to heaven. But a very strong performance I've always been bullish about that business. While the results so far this year are very strong, and they're gonna keep getting stronger. So it's a really good story that keeps getting stronger, but I wanna make sure I keep investing as well. At the same time. That will have an impact on our OI margin for a while.
Operator: Our next question from the line of Mike Harrison with Seaport Research Partners.
Mike Harrison: Hi. Good afternoon. Just looking at the balance sheet and the $1.9 billion cash on the balance sheet is kind of an elevated number. I know that you have about $600 million worth of notes that are coming due, but any other explanation of why that cash balance is getting so high and kind of should we expect that to remain high you know, adjusted for that $600 million of notes payable?
Christophe Beck: Hey. Good to hear you, Mike. I'll pass it to Scott, obviously.
Scott Kirkland: Yeah. Hey, Mike. First, I'll just start by saying our priorities around capital allocation have not changed. As Christophe said before, it's dividends, invest in the business, and what's left over, we think about buybacks. As you said, balance sheet's in a great position. Net leverage is down to 1.7 and just for reference, our long-term target is around two times. In a very good position, as you said, about $1.9 billion at the end of Q2, that included $500 million from a bond offering we did in June. That was in advance of a euro maturity of about $525 million in that we paid down in July.
So there was a little bit of a timing from the bond offering on maturity here. Still even after that, cash remains high, but it's really the fact that we have the strong balance sheet, and we like the option gives us to create value, particularly in this environment. Right? As Christophe said, we get to invest in the business. Capabilities, capacity, firepower, innovation. At the same time, we have a very good M&A pipeline that we'll be opportunistic about, but also very disciplined in a great position to enhance value by investing in those growth engines that he talked about, water, GHT, life science. Digital, and but be disciplined about it to make sure we drive great returns.
So we like the position we're in.
Operator: The next question is from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Laurence Alexander: Hello. So one question about the gross investments that you're doing on the in the three gross areas. Or the three priority areas, how does the IRRs and cash paybacks or payback periods compare with the more traditional investments that Ecolab would do in the institutional and in the now co business in the nineties, 2010? Can you just give a sense versus any material difference in the economics that you're seeing?
Christophe Beck: So I don't have an exact answer to that. I don't think that Scott has one either, but it's four businesses first. And depending on how you count, it can be even five. Because it's life science, it's GHT. So global high-tech with two parts, data centers, and microelectronics. It's pest intelligence and it's Ecolab Digital. All four or five are growing very fast. So close to $3 billion, growing double digit. Which margins that are closer to a 30 than a 20. That's a very good story. So if margins are over average, and as you know, we invest as we go as a business, as a business model principle, basically.
We should have a return that's higher than the average. That's my rocket scientist math. I'm not the science guy, but that's the way I would look at it, and that's why I keep investing in those businesses where I know there will be booming. When we think about biopharma, well, this is the future of pharma. When I think about data centers, where we're growing 30%, we have technology that no one else has. In order to really help data centers shift the power that's being used for cooling which is 40% of the power by the way towards compute. When we think about microelectronics, think about one of the big microelectronics manufacturers, in Asia, in the world.
Today uses as much water as one of the largest food company in the world in one year. So you put those two numbers together and say, well, water solutions will be game-changing for that industry. Pest intelligence, we talked about it, and Ecolab Digital, that's doing unbelievable work under David Bingenheimer's leadership here. It's been a year $380 million annualized business growing 30% at very high margin. Those are all businesses that are gonna be great down the road. For me, I know it's higher than average in terms of return. It's definitely the right thing to do.
Operator: Our next question is from the line of Josh Spector with UBS. Please proceed with your question.
Josh Spector: Yes. Hi. Good morning. I was wondering if you could size how much you think you're reinvesting in the business today versus what you thought you would do in 2025 six months ago. And if you could just help us understand kind of where that is going, I guess, the context that your SG&A is actually down year over year, where is that going? And kind of how do you think about the timeline of that payback somewhat similar to Lawrence's question? Thanks.
Christophe Beck: It's a difficult question to answer here. But you've heard from Scott in terms of CapEx. So it's been one percentage point plus that we've invested this year. And since it's working quite well, it's maybe something we might be continuing to do as well. In SG&A, it might be half a point. It depends how you define that very clearly. But we want to make sure that you focus on three things. The first one is safe firepower, which means serving customers. Second is digital technologies. And third is one Ecolab. This is where we invest, how we invest, and really making sure that we build those businesses as strong as we can.
So I hope it's giving you some perspective on how we're thinking about it. But at the same time, like the life science example, before, I want to know. What's the margin. Preinvestment, and postinvestment so that we know what's the long-term run rate and life science sets of mid-teens reported, mid-twenties underlying and while the business grows, that's gonna go up as well at the same time. So very focused, very controlled, and we know where we're going.
Operator: Our next question is from the line of Jason Haas with Wells Fargo. Please proceed with your question.
Jason Haas: Hey, good afternoon. Thanks for taking my question. This one may piggyback off the last question, but I'm curious if you could maybe give some examples of the cost savings and efficiencies that you've been able to as you've implemented OneEcoLab and some of your other initiatives. Thank you.
Christophe Beck: Hey. That's a great question. So for Scott, we've done an amazing work in one Ecolab, especially the one company part which is really aligning the whole company behind our customers, by leveraging technology, GenAI in dramatic ways, probably one of the companies most advanced, in that work. At least that's what we hear out there. So, Scott, why don't you share a little bit what you see in my you're doing?
Scott Kirkland: Yeah. Absolutely. Jason, as you said, SG&A leverage is very good. We drove 50 basis points in Q2. Expect to drive that 20 basis points we talked about earlier in the year as we continue to invest in the business. The one thing I do want to note, and I'm going to take opportunity not every quarter will be created equal. We expect Q3 SG&A to be up a couple points sequentially, Q2 to Q3. In part due to FX. If you look at FX last year with a favorable item in Q3, it'll be unfavorable this year.
But sticking to the core of your question on the savings, what's driving that leverage is one EcoLab, which is allowing us to reinvest in the business. As we've talked about, Ecolab is a growth program. But at the same time, there's productivity that we're getting out of it. We're focused on driving this growth with our cross-sell opportunity, which is $55 billion. But at the same time, we're driving great efficiencies as we do that. We're ahead of schedule on a $140 million of savings. Would say we'll be a little bit north of 50% of that realized in 2025. Of course, the costs come a little bit ahead.
And driving those savings is how we use our five global centers of excellence right, and create some scalable processes. And leveraging that hygienic AI that Christophe talked about, automating and augmenting people. Work, right, which includes which improves the experience of both our customers as well as our associates. So I expect, as I said, the SG&A leverage to be about 20 to 30 basis points in 2025. As we continue to then to reinvest in the business. But beyond 2025, that platform from one Ecolab and the digital platform that we're building there, it's gonna help us generate leverage above our historical average, which has been about 20 to 30 basis points.
Operator: Next question is from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your questions.
Kevin McCarthy: Yes. Thank you, and good afternoon. Christophe, I appreciate your cation into the 85% that's doing well in the 15%. Where basic industries are more challenging. I'm curious as to whether the relative weakness in those basic industry markets may necessitate any new or incremental actions by Ecolab? I'm thinking about portfolio composition, resource allocation, productivity initiatives, the like. Or is it the case that, you know, hey. These are really just cyclical end markets, and they'll come back before too long, and it would be a mistake to go down those paths. Maybe a different way to ask the question is, is it purely cyclical, or do you see any structural elements that may argue for pulling some levers?
Christophe Beck: No. I don't see any structural issue. And if there were mean, we've demonstrated that in the past that we have no problem. Of addressing those issues either ourselves or in better hands as we did with our surgery business in 2024. This is not the case. In those two businesses. And if I step back just for a second, one of the big strengths of our company of Ecolab is the number of end markets. That we're serving, the number of geographies that we're serving as well at the same time, which means that when some are struggling a little bit well, the vast majority is doing well or some very well. Like our growth engine, as mentioned, before.
So there will not be all our businesses, all our geographies, being in the green all at the same time. That would be obviously, an ideal world. So I see that as a strength, of the company. And when I think about those two businesses, especially in basic industries, when I think about power, it's been a sleepy business forever, and we have very good shares. We serve most of the nuclear plants not all of them, out there, but it's not been growing for a very long time. Well, this is changing dramatically now, because of all the developments in AI infrastructure, data centers, microelectronics. And so on there, that requires so much more power.
This takes time, obviously, to ramp up, but a business which I thought had limited future, I think has now a big future, and we have all the capabilities and even some of the capabilities that the industry themselves do not have anymore because, well, we were the ones and having it and they just reduced their capabilities and leveraged what we had in the past, especially in the nuclear industry. Well, I think that's gonna be good for us in the future. When you think about our paper business, the shift that we've made, so from graphics paper, which we are much less used to be off our business. It's less than 20% today.
And if our company is of any indication where we're trying to be a total paperless company, everything is digital while the business is gonna disappear. And that's why we're shifting towards consumer products, tissues, and towels, and specialized packaging. I like the innovation that we're making here. We have a lot of science, a lot of R&D. In that field. So we will get to the right place. So in short, those two businesses are not candidates. For strategic options to use the industry term out there. It's much more for us to bring a to the right place, and we know how to do that. So generally, I'm okay with those.
Operator: Thank you. Our final question is from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Scott Schneeberger: Thanks very much. I have I have a question for both of you. Scott, first, just have you had time to consider the One Big Beautiful Bill Act the impact most likely on free cash flow? How you're thinking about that? Any comprehensive quantification? And then Christophe, a lot of discussion, particularly about some of the, you know, basic industry paper, software areas. That seem, you've mentioned earlier, impacted by tariffs. Could you just kind of address a high level how you're thinking about the tariffs right now? How it could affect in the back half, I know it's very uncertain, so you can't really give one scenario.
But, what you're thinking about, what's on your mind, as far as what you may be experiencing in the back half? For the for the broader business? Thanks.
Christophe Beck: Hey. Thank you, Scott. I'll pass it first to Scott, to talk about the BBB, and then cover the other question.
Scott Kirkland: Thanks, Scott. So, hey, net overall, it's still early days, but our expectation is the big beautiful bill is gonna be a net positive for the company. As you think about it, encouraging investment in the US, which is our strongest market growing really well with good margin. At least to the tax side of it, a bit early to quantify any impact, but I would just tell you where I'm sitting here today. I don't expect it to have a material impact on our tax rate, frankly. But, again, net overall, expect it to be overall favorable to the business.
On the tax side, if anything, there'd be some short-term cash tax timing not an overall effect on the rate.
Christophe Beck: So for the second part of your question, Scott, to the tariffs for the second half. Well, they're gonna be more impactful by design. It's just a question of time. But as mentioned before, I feel really good with, our the mechanics as well of it. I see four components of it. So on one hand, so you get the few tariffs, how much you pay, so when you import. But we don't import that much in 92% of what we sell is produced locally, which has been our model for a very long time as a company, and we're driving that up.
The second of the prices going up, so for local manufacturers, because everybody is on shoring, that's the whole idea, obviously, of the tariffs. Here. And then we mitigate that, so first by great supply chain work and I'm really blessed with team we have in supply chain. And we have the trade surcharge. And if I put all that together, it's a clear net positive. And when I look at the outlook for the second half of the year, in practice, in Q2, I feel really good about it, and that's one of the reasons why our pricing is gonna go up in second.
As I've mentioned before, I feel really good about our delivery of our 13% or 12 to 15 for the next few quarters and for 2026 because well, we're in a very fortunate place. Momentum is good. 85% of the business. So 4% and delivering double-digit operating income a very good place. The macro is good for us in terms of waterfall AI instruct in water for AI infrastructure story. I'm gonna get it right. Life science for biotech, productivity in hospitality, and in pest intelligence. And, ultimately, it's our are really strong as a company. I'd like to end where I started as well that whole conversation.
Feel really good about where we're going, really good about the delivery for the next quarters, getting to this twelve to fifteen aiming at this midpoint, and anything that gets above it because of all the good things that are happening. Where it will be shared between investors returns and investments, in future growth, and we'll be totally transparent as we move forward on that journey. But overall, in a very good place I feel good with where we're going for the 2026. So thank you to all of you. And with that, indeed,
Andy Hedberg: That wraps up our second quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thanks for your time and your participation. I hope everyone has a great rest of the day.
Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your lines.