Those are the ones that are doing well, no big change. You have the ones that we need to transform. And those are the ones that, obviously, have potential but are not exactly there yet. And then you have the ones that you need to fix. Healthcare being one of the perfect example of that. Paper would either be on the transform side, because it’s north of 16% margin that we have in that business not great volume growth right now but very good margin and we’ll end up in a good place as well as we keep transforming that business. So that’s the way we think about it. We’re not investing so everyone the same way. It’s really by category along the four that I just mentioned as well. So overall I like the portfolio we have, but we always, kind of, critical for every business, every market to make sure that we have the best owner’s mindset and making sure that we do what’s right for shareholders.
Operator: Our next question is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
David Begleiter: Thank you. Christophe, again just on the delivered product costs, could you unpack the dynamics as to the high single digit increase in Q1? Is that primarily a function of the caustic price decrease last year we saw for I think every month of the year? And then going forward, is your flattening out a function of just caustic being up as the year progresses? Thank you.
Christophe Beck: Thank you, David. I’m looking at Scott and he’d love to answer that question. Scott, happy to.
Scott Kirkland: Yeah, happy to David. Thank you. Yeah, as Christophe referenced earlier, our DPC is still up and again just to clarify 35% versus our pre-inflationary period. And as you referenced we — it peaked in the middle of last year, right? And then we started to see some modest benefit in Q3 some additional single-digit benefit in Q4 and are expecting then that benefit really to peak in Q1 up high single digits. So as we said, and then some modest benefit likely in Q2, as then we see costs stabilizing for the second half. And with the 10,000 raw materials very difficult to sort of isolate individual buckets. Obviously, you have some raw materials like caustic, where we’ve seen some easing, but you’ve also seen other products raw materials like propylene or resins, where we’ve seen those costs going up as well. And so with the big basket of materials hard to isolate any one of those.
Christophe Beck: But what’s important to keep in mind here is really where we focus our attention. It’s really driving the business in order to get on the upper end of this 12% to 15% earnings growth. And what’s happening on the DPC front, we see that all incremental benefit which is exactly what we’ve shared for Q1 in pretty detailed terms as well. We’ll get some more in Q2. And we expect flat from DPC tailwind perspective in the second half. But let’s see what truly happens. Your best guess will be my guess too.
Operator: Our next question is from the line of Pavel Molchanov with Raymond James. Please proceed with your question.
Pavel Molchanov: Thanks for taking the question. In this uncertain macro environment, including the inflationary pressures you alluded to earlier. Can you talk about what you’re seeing on the M&A front, as far as valuations and any particular geographies that perhaps look more enticing than others?
Christophe Beck: Good question, but a difficult one to answer for me, obviously, Pavel as you know. But the way, I always answer that question is, basically what you’ve seen in the past from Ecolab is what you’re going to see in the future. We have an extremely strong balance sheet, now our leverage levels are closer to our longer-term average of these two times, as well. So we’re in a very good position to go after opportunities that we believe are strategically relevant for us. And obviously, that we can buy at the right price, as we’ve done very successfully so in the past. So yes, the market becomes even more interesting right now which is good. We have a rich pipeline as we’ve always had and we will keep focusing on our three key priorities, but as I’ve always shared first is water, second is Life Science, third, is digital and AI technology mostly focused on North America and in Europe.
Operator: Next question is coming from the line of John Roberts with Mizuho. Please proceed with your question.
John Roberts: Thank you, and congrats on making the Just 100 list again. In Healthcare, some companies have been talking about de-stocking continuing. Are you seeing de-stocking in Healthcare? And are you seeing equal benefits between your surgical and infection prevention business now that you’ve got the separation?
Christophe Beck: Hey, John, thank you for your comment on the Just list. We’re never going after awards obviously, but we’re always honored and humbled when we get those awards, that’s basically describing that the way we run our business the right way as much as we can obviously. So the question on Healthcare. I’ve committed quite a while ago so to fix that business with the team. I like the progress that we’re making. We went through a few phases, as I shared very openly with you and we’ll keep doing so in the future. So we worked on the cost structure early on then we worked on the bifurcation of the two surgical and infection prevention businesses by leveraging as well the critical mass of institutional, we early on that journey because that happened obviously in the fall of last year.
Healthcare is growing overall, which is something I like because that’s early signs of success. Our margins are increasing quite significantly from a low level as we know but that’s the second good sign as well of progress and the teams working really well with the institutional team. So I think that we found the right model for now. Again, the work is not finished. We’ve committed to get to double-digit type of margin in that business. And we will get there a few more phases. I expect it as well to happen and I will keep you posted on our plans and our progress as transparently as I can.
Operator: The next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Laurence Alexander: Good afternoon. Could you give a bit more granularity on the trends you’re seeing in Asia, particularly the strong volumes in China? Can you break out where you’re seeing that? And are you seeing sequential acceleration? Or is it just a comp issue?
Christophe Beck: We’re in a fairly good place actually in Asia, especially China. For us we separate our Asia Pacific, and where we have a few markets in China, which is one of the mega markets. As you maybe remember, North America, Western Europe and Greater China to be our three mega markets, where we focus 80% of our retention, where 80% of the opportunity lies as well. And I like quite a bit how we’re working in China, not an easy environment as we all know, but growth has been good in China, especially in Institutional. We have a great team, a great business and we have very good margins as well in China. That was not the case 10 years ago but that’s clearly the case today. So we have a very good business, a great team, very well positioned with what customers in China wants, when we think food safety, infection prevention and water that’s exactly what they’re looking for as well.
So pleased with the evolution of China, and that’s true with the rest of Asia Pacific as well but every country is a bit in a different place but in aggregate a pretty good story.
Operator: Our next question is from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.
Shlomo Rosenbaum: Hi. Thank you very much. Christophe, you made tremendous strides in the margin over the last little bit and the pricing has been very successful and it looks like volumes have turned positive. So there’s a lot of positivity there. I was wondering if you could bridge us from where you are today to where — you mentioned getting to that 20% margins. And can you walk us through that bridge, how much would be pricing? How much would you think about in volumes? Is there a certain cadence that we should be thinking about over the next several years? Just give us your thoughts on how investors should be thinking about it how you’re thinking about it?
Christophe Beck: I’ll give it to Scott first and then I’ll make a few comments.
Scott Kirkland: Yes, thanks Shlomo. Great question. Yes, as we’ve talked about — and we talked about at Investor Day, really very focused on getting to that 20% OI margin and I think we have a very clear path over the next few years. And it’s largely by getting back to those 2019, sort of, pre-pandemic gross margins right, which are still down relative to 2019. If you look at overall OI margin, so we finished the year at 14%, so about six points from that 20% OI margin. And by recovering those 2019 gross margins, which is really split pretty evenly between the value-based pricing, what we do for our customers, driving that value-based pricing, and then the other half of that being volume and mix sort of combined there, okay?
As we showed during 2023, our OI margins were up 140 basis points. And we’re expecting about another 200 basis points in 2024. So, we think that’s great evidence for what we can do and that path to get to that 20% OI margin. And then additionally in there aside from the gross margin, we’ll expect to continue to deliver some SG&A leverage at least equal to what we’ve done historically.
