Ecolab Inc. (ECL) Q2 2022 Results - Earnings Call

Ecolab Inc. (NYSE:ECL) Q2 2022 Results Conference Call July 26, 2022 1:00 PM ET

Company Participants

Andy Hedberg - IR

Christophe Beck - CEO

Scott Kirkland - CFO

Conference Call Participants

Tim Mulrooney - William Blair

Ronan Kennedy - Barclays

David Begleiter - Deutsche Bank

Seth Weber - Wells Fargo Securities

John Roberts - Credit Suisse

Josh Spector - UBS

Christopher Parkinson - Mizuho

John McNulty - BMO Capital Markets

Ashish Sabadra - RBC Capital Markets

Jeff Zekauskas - JPMorgan

Vincent Andrews - Morgan Stanley

Steve Byrne - Bank of America

Scott Schneeberger - Oppenheimer

Dan Rizzo - Jefferies

Andy Wittman - Baird

Eric Petrie - Citi

Kevin McCarthy - Vertical Research

Rosemarie Morbelli - Gabelli Funds

Mike Harrison - Seaport Research

Operator

Greetings, and welcome to the Ecolab Second Quarter 2022 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations. Mr. Hedberg, you may now begin.

Andy Hedberg

Thank you, and hello, everyone, and welcome to Ecolab's second quarter conference call. With me today are Christophe Beck, Ecolab's Chairman and CEO; and Scott Kirkland, our CFO.

A discussion of our results, along with our earnings release and the slides referencing the quarter's results, are available on Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials which state that this teleconference and associated supplemental materials include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected.

Factors that could cause actual results to differ are described in the Risk Factors section of our most recent Form 10-K and in our posted materials. We refer you to the supplemental diluted earnings per share information and release.

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

Christophe Beck

Thank you so much, Andy, and welcome to everyone to our conference call. And Andy, welcome to your new role as Head of Investor Relations after 15 years in the industry and 6 years alongside Mike Monahan. In 37 years, Mike has built a legacy of trust, transparency and simple messages. He has built trusted relationship with all of you on the call by listening to you, by addressing your concerns and by building on your ideas in good and in more challenging times.

He said openly with you what we were seeing, what we were doing about it and where we were going to keep winning. And in a world that feels like it's getting more complicated by the day, he kept describing our performance, our opportunities and our concerns in simple and clear ways to make your life as investors as simple as it could be. And none of that will change. So on your leadership Andy, we will simply build further on Mike's great legacy.

Now to our results. The second quarter concluded as expected while facing 30% delivered product cost inflation and increased headwinds from FX translation. Our global team managed to deliver once again sustained double-digit organic growth by driving new business and by accelerating pricing, both great signs of the real value we create for our customers and our margin growth potential.

We almost doubled our total pricing from 5% in the first quarter to 9% in the second as we further strengthened our structural pricing and executed our first ever global energy surcharge with customers around the world in all our businesses in 172 countries in an extraordinary short period of time.

We're now exiting the quarter with double-digit sales growth and pricing momentum that's now ahead of delivered product cost inflation, most importantly, with gross margins that have now turned the corner. In other words, we expect to see easing year-over-year margin pressure over the next 2 quarters. We're now in a fortunate position where our #1 strategic priority over the past 12 months has been addressed, getting ahead of inflation. This will now help us fully recover our gross margin over time and expand them even further in the long run.

With margins getting on the right track, the time has now come to shift our primary focus to offense. With an environment that keeps getting more complicated, we do not expect the world economy to accelerate. We're, therefore, getting ready for that, too. Our new business is strong, and innovation pipelines are at record levels.

Our customer retention has remained largely unchanged, still north of 90%, with the industry's largest and best trained sales force, with the resources and the capabilities to get the job done and serve our customers better than ever, with a business model with over 90% consumable revenue, with innovative technologies and services that are helping customers reduce their total operating cost when they needed it most like right now and a growing $152 billion market opportunity that will remain huge no matter what happens to the world economy.

We, therefore, entered the second half of the year in a position of strength, with strong growth momentum and growing share across the board, with inflation and energy costs that seem to keep getting higher, especially natural gas in Europe and in the U.S., with the right pricing momentum to stay ahead of inflation and the right mechanism, if I may say, with the energy surcharge to mitigate spikes of energy costs over time.

This shift from focusing primarily on pricing to major share gains will naturally take some time. But as we've demonstrated in the past, it will also lead to strong results down the road. We, therefore, expect overall performance to improve sequentially in the quarters to come. Q3 earnings will, therefore, continue to be driven by strong top line growth, easing year-over-year margin pressure, supported by solid pricing, but in the short term will also be impacted by unfavorable currency translation and potentially softer volume growth as the team shift their focus to major share gain. As a result, we expect Q3 to show a sequentially narrowing decline in year-over-year adjusted earnings per share, including the impact of at least $0.10 of FX headwinds.

Now with the total pricing already at low double-digit levels, new business generation to drive share gains, breakthrough innovation and productivity benefits to drive margins, we expect fourth quarter to show accelerated adjusted earnings per share growth, resulting in modest growth in full year 2022 adjusted earnings per share.

Now let me conclude my remarks on a more personal note. I love growth, and I hate just as much as you do low earnings growth. This is not we are uncertainly not who I am, except when it's because we've done the right thing, the right way for our future, like keeping our global team and capabilities intact at a very high cost during the COVID lockdowns. Like managing pricing in a way that protected long-term customer retention, like maintaining growth investments in new products, digital technologies and new high-growth businesses to gain market share and significantly increase our opportunities.

As intense as it is right now, our near-term momentum keeps building and our long-term opportunities have never been greater. That's why I've never been more bullish about the future of this company. Our $152 market -- our $152 billion market opportunity keeps getting bigger. When infection risk keeps rising with pandemic, with hospital-acquired infection, and we put safety challenges like we've seen lately in baby food production, we need to help our customers.

With water scarcity and a warming climate that's hurting businesses and people, we had to help our customers reduce their total water and carbon footprint while reducing the total operating cost, helping to deliver superior long-term performance for them and for our shareholders, which is why I firmly believe that with Ecolab the best is still yet to come. I look forward to your questions.

Andy Hedberg

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

Question-and-Answer Session

Operator

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

Tim Mulrooney

So I'd love to ask you about your share gains and innovation and all that. But I think I've got to stick to the basics at least starting out here. So my first question is about raw material costs, not surprisingly. And then I've got a follow-up on pricing. So Christophe, the last time we spoke, it was your expectation that delivered product costs would be up about 25% in 2022. Is that still your expectation? And can you kind of break that down in between what you saw in the first half of the year versus what you expect in the second half?

Christophe Beck

Yes, great question. So talking about raw materials. So first, I'd like just to step back, so one step last year. So in '21, we had 10% of delivered product cost inflation, which includes rolls and freight, just to be clear as well on this one. We entered the year '22, expecting 15%. Then you're right, we talked about 25%. And today, we're closer to 30% right now in the second quarter, and we expect that level of inflation close to 30% to remain until the end of the year.

Tim Mulrooney

Okay. Got you. So it was a little less than 30% maybe in the first quarter, but then -- but 30% in the second quarter and for the remainder of the year. That's helpful. And then now if we layer on the pricing part of the conversation, Christophe, how I guess, net price cost turned into a net positive in June. Can you talk about how you expect for, I guess, what you expect for the price/cost spread, how you expect that to play out through the second half of the year? And what that implies for gross margins moving forward?

Christophe Beck

Yes, with pleasure. So the 30% as well so that we are experiencing so right now and going forward for the next few quarters as well, just to put it in perspective, so represents $1 billion, of course, that our teams had or will have to overcome so during the year to 2022. And that's why it's been so remarkable that the team managed to get ahead of inflation during the last months of the quarter. When initially, we saw that would happen in the first quarter of the year, the war started then in Ukraine and shifted, unfortunately, one more quarter. Because energy costs went through the roof, we started with the energy surcharge, which worked out really well in the second quarter. We got structural pricing plus energy surcharge kind of well implemented during the last month of the quarter, and that's how we got ahead of delivered product cost inflation so at the end of the second quarter.

So when I think about the second half of the Europe, we got the job done. We're ahead of inflation. That will remain for the foreseeable future, obviously, which means that the margin pressure is going to ease over the quarters to come. This is going to be true in Q3. But it is going to be even more true in the fourth quarter as pricing and the energy surcharge together are going to keep accelerating. I talked about low double-digit levels in the second half. And if we assume an easing of the 30% rate of inflation for the next 2 quarters, Q4 should be a very nice margin play, which is why we're expecting as well accelerated growth in terms of earnings per share in Q4.

Operator

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

Ronan Kennedy

This is Ronan Kennedy on for Manav. Christophe, may I ask if you could just recap the outlook? I know you touched on potentially unfavorable volume growth or growth not accelerating as initially anticipated. Can you just recap what the outlook is for the second half and into '23 from a growth standpoint? And if you are starting to see -- obviously, the inflationary pressures are immense, but are you starting to see some macro pressures as well?

Christophe Beck

Well, great question, Ronan. So the overall picture for 2022, we were expecting, from an economic perspective, a continuous acceleration during the year, over the past few months, obviously. So the environment has changed. That being said, our own trajectory as Ecolab has remained so fairly stable. So 13% organic growth in the first quarter, 13% in the second quarter and we expect something similar in the quarters to come as well. But it's basically, so having our own views focused on the potential risk of an economic slowdown, all indicators are showing that direction.

In our own businesses, it's not obvious yet, but we're not immune, obviously, to whatever could happen in the world out there, which is why, first, we believe in our models being great in that kind of environment, which is very different than the lockdowns of COVID, which was just an industry, so stopping to operate. When we talk of a slowdown, this is something that we're very used to. And we like it because our model ultimately 90% consumable revenues. So that means recurring our promise to customers. It's to help them with premium products, reduce their total operating costs ultimately when they need us even more in those moments.

So our model is very well aligned with a potentially slowing environment. And ultimately, that's why, as I've mentioned as well in my earnings calls that the shift from primarily focusing on pricing to primarily focusing on new business will come at the right time as well, which is a shift that we've done many times as well in the past.

So overall, an environment that might be slowing down with what we're undertaking, so expecting some kind of a stable momentum in the quarters to come with a potential downside risk that we can manage as well.

Ronan Kennedy

That's very helpful. And with regards to that shift in focus, I think you had also referred to it as going from defense to offense. What does that entail, that shift to focus on new business wins? And then are there other elements to kind of a downturn playbook that may be different than the approach that was taken during the unprecedented height of the COVID pandemic, where the focus was on, protecting the company, your employees and custom?

Christophe Beck

Yes. I think that what we're heading towards to today is kind of something that the company has been used to any -- more difficult times over our history. We are a sales organization. We have a sales culture with sales driven, which means that half of our company is driven by 2 things. The first one is new business. The second is price. And since -- it's all about execution, it's important to set for the organization, what's the clear primary priority? Is it price? Or is it new business? While you do both, obviously, at the same time?

Well, in the last 12 months with this high inflation that came on us, like everybody else, ultimately, primary focus had to be pricing, and the team got it done. And now it's kind of shifting and saying you focus primarily on your business, while you keep driving pricing. So it's selling new accounts, it's expanding penetration, it's selling innovation, while you get price as well because we create more value as well as.

So it's a shift between primary focus from price to new business that we've done over time in our history. It takes a few months, obviously, so to get in gear, but this is something that we're very familiar with. So I'm not worried about that.

Operator

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

David Begleiter

I'm sorry, can you hear me?

Christophe Beck

Yes, we can hear you, David.

David Begleiter

Sorry about that, Christophe. Back to the Q4 guidance, Christophe, you're guiding to about 20% share growth. EPS growth from Q3 to Q4, a pretty sharp ramp up. Is it just the additional pricing? Or are there other drivers of that additional price increase -- that additional earnings growth from Q3 to Q4?

Christophe Beck

It's the combination of many factors. When we think about the third quarter, so to begin with, so it's mostly impacted by FX, the $0.10 that we've talked about. Otherwise, the EPS would be growing in the third quarter. And if you look at Q4, it's going to be the combination of business momentum, so driven by new business, as mentioned before, added to a pricing that's going to keep strengthening together with the energy surcharge as mentioned, so we'll be in the low double-digit territory as well.

Our productivity work is going to keep working as well in our favor. And we expect as well a stabilizing of the 30% of delivered product cost inflation rate, as mentioned before. So the combination of all ultimately is playing to the Ecolab model where you see margins enhancement during the fourth quarter. It's not going to be an improvement versus last year, but it's going to be a sequential improvement from Q2 to Q3 to Q4, which, by the way, David is really playing in our favor longer term as well as we rebuild our margins fully and then afterwards even expand that.

David Begleiter

Understood. And just briefly, of the energy surcharge you announced of 8% to 12%, how much do you actually realize?

Christophe Beck

It's hard to tell exactly the number. It's part of the 9% or the low double digit for the second half. We estimate that it's roughly 2/3 is structural pricing and 1/3 is the energy surcharge. When we communicate in our press release that's always directional, that's a max and then afterwards, you need to respect agreements with customers, you need to negotiate with customers as well. And some customers have even chosen to have the energy surcharge being included in the structural pricing, which makes the line between the 2 a little bit more fuzzy. But I think that a good guide might be this 2/3 structural price and a 1/3 energy surcharge.

Operator

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

Seth Weber

I guess just another pricing question, Christophe. I mean talking about, say, 6% or 7% structural pricing. Can you just give us your view on Ecolab's ability to retain that next year into 2023? I'm not asking for guidance for next year, but just your confidence level and the company's ability to keep that type of pricing next year?

Christophe Beck

Yes. Thank you, Seth. The structural pricing, I have a very high level of confidence that we're going to keep it. This is what we've done over the last 99 years as a company. So we're not cyclical in terms of pricing evolution. So structural price is going to stick, the way we execute that with customers.

The energy surcharge will be more of the question. I don't think that the energy costs are going to come down anytime soon, unfortunately, I may almost say. And maybe one piece of information for you, Seth, is also that our energy surcharge, which was anchored on oil price, Brent that everybody could read, has been complemented, but the natural gas prices as well, which is becoming a bigger issue in Europe and in the U.S. for the same reasons as we know.

So it's going to be a combination of oil and natural gas, which is why initially we called it as well, the energy surcharge. How much are we going of keep all that? Whenever the market comes down, I think we're going to keep part of it and some might be given back. But overall, the discussion with customers is driven by how do we build margins on our side, that's our internal discussion, but most importantly with customers is making sure that the return that they get on the investment that they've made in our value gets a positive return, which is EROI.

So I feel good about the way we can maintain our pricing that we've executed here. Some might get back, but it's going to be marginal.

Seth Weber

That's helpful. And then maybe just a quick follow-up on the health care and life science margin was a little bit light versus what we were thinking. I saw some of the call outs in the slide deck and things like that, but is there anything that would prevent the margins there? Is there something that's going on there just structurally that -- the Purolite margin is obviously very high. So we're assuming that margins there get a lot better. Can you just talk about the ramp that we should expect in the health care and life science margins going forward?

Christophe Beck

Yes, it's really 2 different stories. As you saw life science and Purolite are doing very well. So no issue on that side, and it's been very steady in the past and it's going to be steady in the future as well. Health care is a different story. That's where our challenge lies. Three things that I would mention. The first one is pricing with TPOs takes more time than with customers. That has an impact on margin. Secondly, North America, elective surgeries took more time than expected initially, that's been on and off. So during COVID as we know. So quite a few times, that's where we make most of our money as well, like hospitals do as well at the same time. That has an impact on the health care margin.

And third, in Europe, so we still compare to the so-called mega deals with government COVID activities related in '20 and '21, which is also having an impact on the Healthcare margins. But let me be very clear. Healthcare is not where it should be. It's not been so for a long time. There have been some better and some less great times in that business. We focused on it. We need to fix it, and we will fix it.

Operator

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

John Roberts

It sounds like base price is up 6% on its way to 7%. What is the base cost inflation that you're seeing? That is, what are costs up excluding energy?

Christophe Beck

It's a difficult question, David, because when we talk about energy, we don't buy energy directly, as you know. But the way we think about it is 1/3 of our raw material cost is impacted by energy. And again, when we talk about energy, you have oil and then you have natural gas. So what we buy are second or third derivative of that. That's why it's a difficult question to answer here.

But I would say one way to think about it, we were thinking 2022 to have an inflation of 15% plus. We are at 30% right now, to a great extent that DPC incremental inflation came through energy following the invasion end of February. So that's maybe one way to think about it. But hard for us to really split the 2, I'd rather focus on the 30% delivered product cost inflation, which is the true number.

John Roberts

Okay. And maybe a different way to ask about price. But when you started to implement the surcharge WT oil was about $120 a barrel, and now it's $95. And back then, TTF gas was $25 million BTU, now it's $60. Can you help us understand like an average U.S. surcharge has gone down, I assume, because of the WTI drop and the average European surcharge is going up because of the TTF gas increase?

Christophe Beck

No, because -- so the Brent is still north of $100 right now, which is the same bracket as where we started in April, so during the second quarter. So no change there. And it's not a perfect science as well because if customers were to pay straight math, obviously. So you're in that bracket, and you get 10% to take what we had in the press release, well, that’d be one situation. It's a negotiated number, which means that this one is not changing every month either.

On top of it, as you mentioned and as I've mentioned as well earlier on that call, natural gas, is the new game in town. You've mentioned the number in the U.S. going up pretty rapidly and in Europe even more. So basically, where we are is that surcharge in the U.S. kind of unchanged to up because we are still executing more with customers that we haven't concluded yet. And in Europe, we're moving further up because of the natural gas price increases that you've just mentioned.

Operator

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

Josh Spector

And actually, a similar vein of the prior question. I was curious, just to clarify, is the surcharge essentially in for all customers now? Or is there some percentage that's still being negotiated? And when does -- take effect during the third quarter? And similar to kind of the prior question to an extent, if energy prices go up 20%, 30% into the fourth quarter, you have the surcharge in place, are we going to be talking about that there is a price cost catch-up in fourth quarter? Or do you feel relatively insulated at what you've done has immunized that risk now?

Christophe Beck

It is not major shock in the system geopolitically, which could happen. If you look at what's happening with Russia and Ukraine today, we should be in a good shape. We are ahead of inflation as we exit the second quarter, as mentioned, and we will stay ahead with increased pricing in Q3 and Q4 and further execution of the energy surcharge as well in the months to come. So both together brings me in a reasonable place for Q3 and Q4 that we will stay ahead and expand as well. So the margin leverage or margin impact that we have on our business.

Second, if something happens as well in the world, in Western Europe, especially impacting natural gas, as we just mentioned before, with David as well. With the energy surcharge, we have a mechanism as well that we can fairly short-term change in order to capture more pricing through the energy surcharge. So this is pretty handy, which was what we had in mind when we launched as well that, but was not just to react to what was happening back then following the invasion in February, but also being able to react with whatever could happen as well in the months and the quarter to come.

So bottom line, I feel quite good about staying ahead of inflation and rebuilding margins in the months and quarters to come to fully restore and expand even further. And if something happens in the world, it might take some time to increase the energy surcharge, but we have the mechanism to address that as well.

Josh Spector

And just to clarify, the inflation for the second half, you talked about 30%. What is a 2-year stack of that inflation that you guys are planning for?

Christophe Beck

The 2-year stack, that was your question, Josh?

Josh Spector

For the second half, specifically, yes.

Christophe Beck

Yes. Last year, we had, as mentioned, so we had 10% in Q3, we had 20% in Q4. And you add the 30% of this year itself, that's how you get your stacked 2 years model.

Josh Spector

So will be at 30% to -- 40% to 50% is how you're thinking about it?

Christophe Beck

Directionally, that's right. Yes, over 2 years.

Operator

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

Christopher Parkinson

Christophe, a lot of your platforms and services ultimately pertain directly to your customers facing their own inflation, whether it's low temperature warewashing systems and even some stuff around your commercial and water treatment in terms of prevention and obviously facing inevitably rising costs in their own side of things.

Can you just offer a little bit more color on your ability to kind of continuously push price just given the environment your own customers earn? I mean has the narrative really changed between the value-added proposition of your products and services over the last year and do customers ultimately recognize that. So just any color on that would be greatly appreciated.

Christophe Beck

That's a great question, Chris. Thank you. Well, it speaks to our model that you're really familiar with. And our promise as a company has always been best results at the lowest total operating cost which we measure with EROI, which is basically, so how much cost savings versus investment customers are making. And our ambition is to be north of 25% return for the customer in here with pricing in here as well, and we stick as well to that model, the way we're operating with customers today.

Usually, we know of the 25%, which gives us as well some margin as well, need to get even further pricing. So, so far, it's worked out pretty well. That's why I mentioned that our customer retention has remained very stable over the past 12 to 18 months. But going forward, focusing even more on EROI will be essential for 2 reasons: first, to really keep executing pricing. But most importantly, in times where economic environment might evolve as well. So to the downside, if I may say, without mentioning the R word as well in here, customers need it even more. This is true in warewashing. This is true in laundry. This is true in water. And it gets compounded as well that most of the customers have a hard time as well to find staffing to get the job done.

Well, our offering helps them get the same results or even better results with less people and less cost at the same time. And that's why our value proposition is pretty ideal in such an environment where we help customers get better results with less people and lower cost. That helps us execute margin and drive more new business.

Christopher Parkinson

Got it. And then in honor of Mr. Monahan, I'll make sure I say this correctly. And as it pertains to your pest elimination business, not control, but elimination, I will always remember that, give us a quick update. It seems like things are kind of reengaging there. You're getting a little bit more momentum on specifically North America. It's been a huge focus of your -- your kind of ongoing enterprise selling initiatives. So just can you just help us kind of offer the framework of the current environment and how we should thinking about that in the immediate and longer term now that it seems like you're getting a little bit more -- a little bit more traction in terms of the recovery?

Christophe Beck

I love the relation to Mike Monahan, that's true. It's pest elimination, unlike competition, that's controlling. You still have mice and rats running around, but you have less than before. With Ecolab, you have none, which is our promise.

So to the business in here, pest elimination has been an exceptional business for many, many years. It's been strong during COVID in 2020. It was strong last year as well. You maybe remember it was a double-digit top line growth. It's been expanding its margins as well both gross profit and OI ratio as well.

And when I look at 2022, while it's kind of steady eddy, we are in double-digit territory as well in terms of top line growth as well, with very strong margin as well. That's why I don't talk much about pest elimination because the business is doing extremely well, has done well during difficult times and is doing well right now. It's a great team, very well led. And I look forward to even more going forward, a beautiful business.

Operator

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

John McNulty

Christophe, maybe we can speak to the end markets for Institutional. So I know you're kind of battening down the hatches it sounds like for a potential recession at the same time. I guess I'd be curious to know where your institutional business is relative to pre-COVID. And if there's still some uplift to go there even if we do kind of stumble a little bit into recession, I guess, how would you characterize that?

Christophe Beck

Yes. Great question. John, Institutional is in a good shape and evolving very nicely. Honestly, I had expected that the market recovery would happen way faster, way bolder. It's not what happened. That has nothing to do with us. Obviously, this is a market question. But when I think about our business Institutional, well, if you compare it to 2019 for instance, which is kind of the base of pre-COVID, we are 5% ahead of 2019. We were 2% ahead of 2019 in the first quarter. So that shows that the business is kind of in a good place and evolving very nice as well.

What's most interesting is that we're gaining shares as well to the comparison that we've done so many times as well as for the U.S. restaurants. If you look at dine-in traffic, which means people coming in dining rooms, well, it's down 36% versus 2019. Our business in the same place is down only 3%, which means that we've gained a huge share as well in the meantime. So at the end of the day, we're ahead of '19 in terms of sales in the second quarter. In the quarters to come, 2 or 3 quarters, we will also recover the volume and in the second half of '23, I believe we will recover as well the margins, which is the plan that we had all along. So all in all, in a pretty good place.

John McNulty

Got it. No, that's helpful color. And then I guess the second question would just be on the raw material front. So your Industrial business, in particular, if I have it right, has a reasonable amount of exposure to like propylene derivatives, things like that. Propylene is off -- at this point, it's off about 25% quarter-over-quarter. So I guess, can you help us to think about that kind of basket and if you're starting to see any raw material relief yet or if it's more just look, these are derivatives, it takes time, but that's still on the come as we kind of look to the back half of the year? Is there a way to think about maybe some relief coming for you?

Christophe Beck

It's clearly the latter, John. So we don't buy anything at spot prices or there are some exceptions probably. But generally, no, it's all contract based more longer term. As you've mentioned, it's derivatives, second or third of feedstock as well, which means that it takes time to get through the system for us as well, which means as well the spikes are not that high, but it goes higher and stay longer as well so for us. But when I think about Industrial, they've done an exceptional job at pricing.

They're ahead of the average, they got most of the DPC delivered product costs impact. Since inflation started in the second quarter last year, they've gotten on pricing, on the energy surcharge extremely well. They're ahead, obviously of DPC as well as they exit the second. They're going to have even higher pricing versus the average of the company. I think they are on an exceptional trajectory, doing really well in new business, in momentum, getting pricing, getting productivity as well.

And if you think quarters down the road, we would like what we will see from the Industrial business, which is half of our company. And I'll just -- and on one thing, it's been especially a part of our business where at every inflationary cycle, they've done really good work in pricing and they helped improve the gross margin as well at each of those cycles as we're going forward. So in a way, as hard as it is right now, it's going to be a good story in terms of margin for Industrial going forward.

Operator

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

Ashish Sabadra

Just wanted to focus on 2 items that was discussed at the National Restaurant Association Show. One was on reigniting the Ecolab certified program. I was wondering if you could talk about how that's coming along? And then obviously, there was a discussion also around the significant pull from customers for digital solutions, next-gen products, if you could comment on that as well?

Christophe Beck

Yes. Thank you, Ashish. So the 2 points situation hasn't changed much, obviously, since we met a few months ago. Ecolab Science Certified, as mentioned, it has been launched during COVID to support our customers in order to protect their own guests and ultimately, so having more people coming to their restaurants or their hotels. It's kept being a very good story. We've become the leading program in the U.S. It's become stronger as well in the meantime.

We're expecting to get in the next few quarters close to $100 million of incremental business, close to 100,000 of locations as well down the road. So it's becoming a major program for us, and for our customers. And ultimately, it's going to move beyond COVID and really making sure that our customers feel safe when they get to their own restaurants as we've talked all along.

Now to digital solutions. Interestingly enough, with most of our customers struggling with staffing conditions as we've seen when you go to restaurants, to hotels, to airports or wherever you go, ultimately, our automated solutions for customers are helping them get the same job done with less people as well. Well, this is not only helping them on the staffing side, it's helping them on the cost side as well, which is good now and even more important going forward. So thank god we kept investing behind digital solutions, which, by the way, are helping ourselves as a company, if you look at our SG&A productivity that has kept improving year-over-year and accelerated as well. So during the past few years, this is almost directly related to the work that we've done with digital.

Ashish Sabadra

That's very helpful color. And maybe if I can drill down further on the volume side of the Industrial segment. Can you just talk about how that business obviously has morphed since the last GFC both on the Nalco front, but also on the core side. And also some of the growth drivers there, particularly animal health and data centers, how those are progressing. So any color on those fronts would be helpful?

Christophe Beck

What's good in Industrial is that it's very broad-based. All the businesses are doing really well. When I look at water, which is the biggest, and strong growth, food and beverage, downstream and paper. So the 4 big ones, obviously, that we have had are all doing really well. So it's not one business driving the whole Industrial, it's very broad-based. And it's very broad-based geographically as well, which is why I feel confident about that business, especially as well going forward.

So in terms of demand, we haven't seen much reduction, if I compare to 2019, for instance, as well, which is the right base because you remove all the noise of COVID as well. In between, there is some noise and variation as well in there. But otherwise, they're pretty steady month after month. We'll see what happens in the months to come with the economic environment, but ultimately, very strong new business. That's going to help them obviously mitigate any softening of demand out there. And second, the pricing evolution is extremely strong as well as mentioned before. So the combination of both is driving a very steady and healthy story for Industrial.

Operator

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

Jeff Zekauskas

You expect the lower earnings per share comparison in the third quarter versus the year ago. You've said that your raw materials are being offset now by price increases. You've got a little bit of negative currency. So does that mean that volumes are about flat in the third quarter year-on-year?

Christophe Beck

So the key points, Jeff, sorry, you're right that Q3 2022 is going to be lower than Q3 2021, as mentioned, mostly impacted by the FX, the $0.10 that I've mentioned as well earlier. So without that, we would be in positive territory. That being said, I'd like to add 2 points. The first one is we compare to Q3 last year, which was a strong recovery in our institutional market. So ultimately, the volume growth in Q3 will be lower than what we have in Q2 because we're comparing to this reopening post the third or fourth COVID wave that we experienced in institutional.

And the last point I'll mention as well, there might be some conservatism as well in terms of volume from my side as well in here. But looking at what's happening around the world, I want to be as well on the safe side. So you have all 3, the FX, the comparison to reopening in Institutional in '21, and there might be as well some caution from our part in terms of economic development.

Jeff Zekauskas

Okay. Ecolab has maintained its staffing levels since 2020. I think with the idea that the global economy would recover and the restaurant industry would come back and that there would be no strong inflationary effects, but there have been inflationary effects. It has been a slower recovery for the restaurant industry. And it looks like we may be going into a recession. Should you be thinking about restructuring your operations or having a lower cost structure than what you've got now?

Christophe Beck

We're not planning for restructuring, at least nothing broad-based. You will always have some pockets around the world. We are a large organization operating in many countries around the world. Obviously, not everything is created equal, and we will keep improving our operations wherever we operate around the world. Broad-based, no, nothing major is expected at least with everything we know right now, so from the environment.

If you look at our SG&A, as well as over the past few years, we've done some very good progress as well in terms of productivity, and we're going to keep doing that as well going forward, mostly driven by digital automation, which means that with the same team we can serve more customers and do more with the customers that we're serving as well are directly driven by digital automation. Which means that if in the past, our company was growing its team more or less at the same speed as the company was growing, that's going to change in the years to come, not because our model has changed, but because our technology is helping our teams do more with less.

And last point, I'd say in hindsight, Jeff, I would do again the same thing. If we would have reduced our team in 2020, when most of our customers did ultimately, well, we would have lost all those relationships. We would have lost all the capabilities and expertise that this team had. We've kept it. This is a huge advantage for us, for our customers in going forward, but our productivity is going to keep improving in the years to come.

Operator

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

Vincent Andrews

Christophe, could you talk a bit about Europe? And I guess I'm less focused on sort of consumer recession-type angles and more just thinking about the energy situation over there and how Ecolab would be impacted if there were natural gas or electricity shortages in the fourth quarter and potentially into the first quarter. Would that do to your own operations and ability to produce or procure raw materials? And what might it do to some set of your -- some subset of your customer base? And presumably, you don't have anything baked in for these risks in the second half guidance?

Christophe Beck

Yes. This is a great question. So these some I know and some we don't know, obviously. So starting first with our business in Europe, overall, doing really well, growing double digit. It's been very resilient during the COVID times as well. So overall, Ecolab in Europe doing really well.

Now to your question of operational resilience, depending on what could happen on the eastern front. We have a very good supply chain team that has been tried years after years when you think about it, so what we went through over the past few years being so natural catastrophes in the U.S. like the Texas freeze or what happened in China as well. So we saw all the lockdowns that we had to go through. We've managed to really supply our customers in remarkable ways around the world in a very difficult situation.

So when I think about Europe, our team was there together as well over the last few weeks thinking about the extreme scenarios and ensuring supply during those times. I feel reasonably good about our ability to ensure supply in the case that natural gas would be stopped from Russia, which I guess is the core of your question. The impact on our customers is way harder to answer because obviously, we don't operate for them. So depending on how they're going to do, that's going to have an influence on us. But this is something I can't obviously influence. The only thing we can do is ensure the supply and driving as well new business with existing and new customers as well to try to mitigate that as well as we can.

Vincent Andrews

Okay. And as a follow-up, you referenced in the back half guidance, you sort of let us knew that maybe you're being a little conservative on the volume side of the equation. Where do you think the biggest risks are to the back half forecast. If it doesn't come in where you think it's going to, what are the 1 or 2 things that you're worried about in relation to the forecast?

Christophe Beck

It's hard to tell. But the hotspots are obviously starting with Europe for all the reasons that you mentioned before, geopolitically, not an easy situation. Obviously, there, we have a great business, doing really well with a very strong team. But okay, we can't create miracles as well either. So I'm very cautious about what could happen in Europe.

In the U.S., the economy is not going to accelerate. We'll see what the print will be for GDP as well in the second quarter in the U.S. Well, it's going to head towards more of a slowdown than an acceleration. So that's the second area. And the third one that was a bit of a question mark, at least a few months ago, was China, have become a little bit more comfortable with the situation in China. Our business is doing reasonably well, all considered as well over there. So first Europe, quite a bit behind the U.S. and way further out China. But overall, it's to remain cautious and to think about all that could happen, to have as well contingency plan in place in case things would differently than what people would expect.

Operator

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

Steve Byrne

Within your water treatment business, are municipal water supply authorities currently customers of yours? And if not, is there something structural about that end market that is not of interest to you? One would think that drinking water standards are only going to get more challenging for these municipalities. And just curious to hear your outlook and interest for that end market?

Christophe Beck

Well, let me start by saying, Steve that we are literally not in the municipal water business by choice. We do maybe a few millions here and there. But it’s totally irrelevant for our company because we do not want to be in that business. We have so much more to do on the Industrial and Institutional and Healthcare end markets that we know extremely well as a company.

When I think about what's the main reason for that? Well, first, it's choice of priorities. We want to really stay focused where we can truly win. And second most importantly, the way we sell, as mentioned before, it's really helping customers improve their total operating cost while reducing their environmental impact. This is a value proposition that resonates extremely well with companies.

Municipal, by definition, are governments. Governments do not think that way. In terms of total operating cost, it's much more what's my budget that I have for the year. This is not the way we drive our business. So there's a mismatch as well here. Is it going to stay like that for the next 50 years? I don't know. But for now, no interest in entering the municipal market.

Steve Byrne

And with respect to innovation, can you comment on what areas of focus you're particularly excited about with respect to new products from innovation?

Christophe Beck

Yes, we have some great stories. It's been the case for many years, obviously, in our company. I would start with a few macro innovation. The first one is Ecolab Science Certified. As mentioned before, this is a comprehensive program for institutional customers, restaurants and hotels that are protecting their guests. That's been a major innovation for us.

In the Industrial field, think about net 0 water. This is a comprehensive set of programs that's helping our customers deliver on the sustainability commitments or ambition as well. We are uniquely positioned to help customers get there. This is a major driver for the future. Think about Purolite. It's an acquired, obviously, innovation that's growing fast, very high margin. This is new to our portfolio.

And the last I'd mention is Ecolab 3D, probably one of the largest industrial clouds out there that we've been building over the years where we have thousands of clients that are connected that can improve their performance in real time compares what the performance unit versus unit within a company, across an industry and across industries as well. So those are 4 key innovation that I would qualify. So as enterprise innovation as well.

But then you can think about data centers as well. We didn't have a program for data centers. It's a new business. We started that a few years ago, extremely successful as well. So this is a good one as well. Think about Lobster Ink,which is also providing online real-time training for institutional customers, hotels and restaurants, with all the staffing changes they have. We have close to 3 million users as well today. So working really well as well.

And I can maybe mention just the last one, which is during COVID, we've launched as well our fastest kill for COVID virus in 15 seconds program for institutional customers, hotels and restaurants as well that have been used as well in the health care. Those are just a little bit a list of innovations that are coming to mind with your question.

Operator

The next question is from the line of Scott Schneeberger with Oppenheimer.

Scott Schneeberger

Yes, I was -- could you elaborate on specifically the Healthcare segment, Christophe. Could we see that return to revenue growth in the third quarter and maybe some commentary on your view of electric procedures -- elective procedures, excuse me, versus pre-pandemic levels?

Christophe Beck

Yes. I want to be careful on this one. So as mentioned before, so Healthcare is a business that still needs work. I like the focus that we have on it. It's going to take some time as much as I hated and you hated as well I think so, thinking about the fourth quarter, so to see growth in Healthcare, not in the group, Healthcare and Life Science. Obviously, Life Sciences is a great shape. It's clearly so health care. I think it's more looking at the fourth quarter growth, its probably more realistic. And if we can improve in Q3, well, that's going to be even better. But I would really focus on Q4.

Scott Schneeberger

Appreciate that. And then could you categorize just overall or summarize -- it was in the press release this quarter or last quarter, investments in the business and last quarter was investments in the sales force. Could you just categorize broadly where the company is making investments and just levels of magnitude? Do you anticipate amplifying that or if the economy takes a turn for the worse, how discretionary on your ability to pull back? You've mentioned just a few questions ago that digital is something that -- it's a very consistent spending logically so. But if you can just categorize the broad base of investments, that would be appreciated?

Christophe Beck

Yes. So macro picture, investments stable. They've been stable over the past few years. They're going to stay stable in the years to come as well. So if you think about CapEx, for instance, 6% of our sales, that's been steady for a very long time and it's going to stay as well like that.

Second, our SG&A, you've seen productivity is improving as well every single year. And we will keep doing that as well. So it's investing in our team, but driving SG&A productivity as well at the same time. If I think about incremental investment, it's going to be mostly on 2 areas -- or 3 areas, sorry. The first one, our growth businesses, like Life Science, like Purolite, like data centers, like animal health, those high-growth, high-margin businesses. We will obviously keep over-investing in those ones because we want to build our leadership position as well going forward.

Second is in digital for the reasons that you mentioned before, it's adding value for our customers, it's driving a better experience for our customers, and it's driving productivity. So all good reasons as well to do it the right way. Included in that, you have cybersecurity as well. The more digital you do, the more cyber risk you get, the more you need to protect yourself. We need to obviously make sure that we're well protected and I like where we are. And third is behind innovation, the products, all the programs I mentioned before as well, to the previous question, we will keep over investing as well. But overall, very steady in terms of overall envelope of investment, both CapEx and OpEx.

Operator

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

Dan Rizzo

This is Dan Rizzo on for Laurence. Just one quick one. If we think about the $0.10 FX headwind in Q3 and a $0.30 for 2022, what are the assumptions for where the euro and the pound are going to be trading over the next 6 months or so or next 5 months or so?

Christophe Beck

That's a great question. Dan, let me pass it to Scott, our CFO, who has more details on that.

Scott Kirkland

Yes. Thanks for the question, Dan. Yes, as you might expect, we're expecting continued rate hikes through the end of the year, probably in the range of 8. And so as you see that FX, it's ramped up through the second quarter, and we're expected to double basically in the second half relative to the first half, so about the $0.30, as you said.

Operator

The next question coming from the line of Andy Wittman with Baird.

Andy Wittmann

Scott, I was hoping to keep you going here, I guess and talk about free cash flow. Year-to-date, the free cash flow of the business is, I guess, I'm calculating just under $200 million, which I think is probably a little bit behind pace. It looks like inventory and accounts receivable has consumed a decent amount of capital. And I suppose given the revenue line, that's somewhat explainable. But could you just talk about your forecast for the year? What we should be thinking about what free cash flow generation could potentially look like? And if there's anything else going on in some of these key working capital accounts that we should know about besides effects from the top line?

Scott Kirkland

Thanks for that question, Andy. No, you're spot on with that is the free cash flow really for the first half of the year is, as we expected. And as you're seeing the increases in sales, the investments in working capital as well as CapEx, which, as a reminder, about half of our CapEx is customer-related equipment. So as we see new business and growth in the business, we invest in CapEx but expect that to be in line, as Christophe said, that 5% to 6% of sales historically. So -- but as you think about the full year, we continue to expect as we talked after Q1 to have our free cash flow conversion in that mid-90% consistent with historical.

Operator

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

Eric Petrie

It's my understanding to get the Ecolab Science Certified deal, you have to buy the majority of products from Ecolab. How does that compare to your existing customer base in terms of supplier diversity?

Christophe Beck

I want to make sure I get your question right. When you say supplier diversity in terms of ethnical minorities, is it what you're talking about?

Eric Petrie

Yes. How much of your existing customer base buys from you versus others?

Christophe Beck

Okay. Well, in terms of customers, this is a good question. I don't have the exact answer for that. So we can work on that and come back, obviously, to you. We are extremely driven, obviously, so by both diversity inside our company and outside our company. So this is true for our customers, and we have good progress there, but I want to make sure we get the right facts, and Andy is going to come back to you.

And when I think about supplier diversity for the company, we've delivered on our commitments. We've improved dramatically as well. So our purchases from minorities as well and diverse suppliers in the country in the U.S. as well, we're perfectly on track versus what we had expected so far.

Eric Petrie

Okay. For my follow-up, how does your volume mix fare by month in the quarter? And directionally, how did it trend in July with the surcharge in place?

Christophe Beck

We usually don't give that granularity. So within the quarter, it's also not a straight line. So within the quarter as well, we have some seasonality as well that's coming as well into play. But we usually don't have big spikes within a quarter as well. So what we've communicated for the quarter is a good proxy in what we've seen in the second quarter. And the third quarter pricing is going to be an even bigger share versus volume which is not surprising since pricing is going up. Total organic growth is going to remain strong, which means that volume is going to remain stable/down in the meantime going forward.

Operator

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

Kevin McCarthy

Christophe, with regard to your Global Institutional and Specialty segment, do you have new structural price increases on the table or set to flow through in the back half outside of the realm of surcharges?

Christophe Beck

Absolutely, Kevin. First and foremost, pricing in our company is happening in every business every single year, and that's been true for a very long time, maybe since the company started as well. So this is really a muscle that we keep practicing every single year. And pricing is something that checks as well in our model because it's driven with the value, the return, the eROI that we are providing to our customers. So we're going to keep driving structural pricing in all businesses, including Institutional, obviously, in the months, quarters and years to come. On top of it, is coming the energy surcharge, which is related to the energy oil and gas markets, as mentioned as well before.

But the beauty of the structural price is really that it's driven by the value that we create for our customers, which is the eROI, how much savings do we help them create in their own operations versus the investment that they're making. And we're really making sure that, that return stays as strong as it can be. So pricing is true for every business, and it's going to continue to be the case in the years to come.

Kevin McCarthy

I see. That's helpful. And then as a follow-up, sticking with the Global Institutional segment. If I look pre-pandemic, you earned pretty consistently between $930 million of EBIT to about $1 billion back in 2018. And so if I compare those sorts of levels to where you're tracking this year, it seems as though you've got maybe $300 million or more of price cost to make up. Do you agree with that math? And if so, what kind of time might be required to restore the profitability to the older levels?

Christophe Beck

As I mentioned before, so to take the big picture, I think from a margin perspective, in Institutional, it's probably the second half of '23 that we're going to get there in terms of ratio. In terms of volume, I'm expecting that first half of next year in terms of sales we had, obviously, already now. We're working as hard as we can to get as quick as we can. So towards those milestones that I just mentioned. But macro, that's a good proxy.

That being said, it's important to keep in mind as well that Institutional like most of our businesses in the company post this cycle are going to be in a stronger place than they were before, driven by 3 things: First, we've gained share. So we have bigger businesses. Second, we have a pricing driven by the value that we create. That takes time to get to the right place, but it's driving margin leverage. And third, we have this digital automation that's going to keep helping. So the SG&A ratio, which is going to be a good story. So taking time I want to do that the right way, it takes more time. It's kind of short-term pain for long-term gain. But I feel really good about where we're going with Institutional.

Last point. Institutional was mostly driven by North America as you know. So from an EBIT perspective, I like the fact that the regions around the world are improving as well in the meantime, especially Europe as well. So it's a business that's getting stronger as well from a geographic perspective, which is also good in terms of stability going forward.

Operator

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

Rosemarie Morbelli

If we look at Healthcare for a minute -- I mean, that has been kind of a problem child for a while. Do you have any specific path to get the margin, the profitability of that business to the level of your other operations?

Christophe Beck

Yes, it's a great question. And you're right that it's been a problem child for quite a while. That's one way to put it. The way I'm expressing it within the organization is to say, well, it's a dream that hasn't come through yet because the promise of reducing hospital-acquired infection in hospital, well, makes human sense, people hurting less and it make a profitability sense for hospitals because it's less work. Obviously, since people are not readmitted for new infections that they get. So I like the promise. I don't like the journey that we've been on. It's taken way too long for us to get to the right place, and we're not at the right place yet.

Now back to your question. So the main driver is really sort of focused on those programs as I mentioned during the Investor Day as well, which is central sterile, for instance, which is kind of like a big kitchen. Our Healthcare team doesn't like when I compare that, that way, restaurants to a hospital, but you have a dish machine in a central steroid with all the instruments coming in. This is where we can play, this is where we know how to win. This is how we know where to make money as well. And that's a core program that I want to strengthen and build around it. Our programs are doing really well. Then unfortunately, only 40% of the total business today, that will grow, the business will improve. It's taking time, too much time, but we will get there as well.

Rosemarie Morbelli

All right. And then if I look at the pro forma gross margin in 2019, it was 44%. What is the likelihood that you can get back to that before 2025, even if we have a mild recession?

Christophe Beck

I feel really good of getting back there. Obviously, the work that we've done on structural pricing, on energy surcharge is going to be the main driver for us to get there. On top of it, you have the productivity improvements, driven by digital automation in SG&A and in our operations as well. So getting back to the 44% is step 1. Step 2 is to build even beyond the 44%. The question will be the timing. And the timing is related, obviously, to the shape of inflation in the quarters and year to come. The trajectory, I have zeroed out that we're going to get to the right place. The only question is how fast we're going to get there. And that's depending mostly on external factors.

Operator

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

Mike Harrison

I had a couple of quick ones, hopefully. One is on Purolite. The capacity additions I guess I thought that some of those were going to start to trickle in, in Q3, but it sounds like you're still sold out through Q3. Is there going to be some additional commercial volume in Q4? And are you at a point right now where you're able to baseload that additional capacity with customer commitments?

Christophe Beck

Yes, we're in a great place. It's an interesting problem to have where demand is really strong with the innovation we're bringing to the market even stronger when we combine. So what we're doing in Life Science and water as well, so for our customers, we're maxing capacity. As you mentioned, we hope to bring that capacity online during the third quarter, knowing exactly when that's going to happen. I don't know yet. And that's why I'm assuming that's probably going to take till the end of the third quarter, we want to do that extremely well.

Quality needs to be absolutely secured. Those are pharma products, as you know, as well, and we want to do it as well the Ecolab way, which means that it's going to be unleashed in Q4 and in 2023. It's taking a bit more time than what I would have wished to build that capacity, but I like the trade of getting very solid quality even if it's taking a little bit more time, I'm building for the future here. If the future is in Q4 instead of Q3, I'm fine with that. The trajectory is going to be really nice. And the more I look at that business, the more like it.

Mike Harrison

All right. Then the paper business continues to be very strong. Can you give, Christophe, some additional color? Are you taking some market share? And if so, is that more of a new customer or a new mill win? Or is it expanding share of wallet with existing customers?

Christophe Beck

It's all of the above. It's a fascinating business, paper. And especially since we've evolved over time from old graphic paper, the paper you write on, to more consumer products, which are tissues and boxes for the most part. This is a market that's strong, that requires a lot of technology that we can provide as well, that is much less cyclical than printing paper ultimately here. So the portfolio shift that we've made in paper towards consumer products has been extremely successful, both from a sales perspective, attractiveness of what we're doing and margins as well because we help those consumer good companies operating at a lower total cost while reducing their environmental impact, they use a lot of water, as you probably know as well and create a lot of waste.

Well, what we offer to them helps them reduce environmental impact, reduce the total cost and improve the quality as well as of the finished products. It's a good story, and this team has been great at executing pricing as well, which on top of it, makes it an even better business.

Operator

We reached the end of our question-and-answer session. I'll hand the floor to Mr. Hedberg for further remarks.

Andy Hedberg

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

Operator

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