Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Good morning, everybody. My name is Tim Mulrooney, and I'm the research analyst here at William Blair who covers Ecolab. For a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. As most of you probably know, Ecolab is the global leader in cleaning, sanitation and water solutions. Just last week, they completed the spin-off of ChampionX. And we are very excited to have with us today, Christophe Beck, the President and COO of the company. Christophe has a presentation for us this morning. And if there's time at the end, I'll ask a few questions. Anyone should feel free to type in their questions to the website, and I'll try to get to a few of them. With that, I'll pass it off to Christophe. Good morning, Christophe.

Good morning, Tim. Thank you so much. And really pleased to be here. Honored to have the opportunity to share with you our story and a little bit an update as well on what's happening as well around us and how it impacts our company and our future in a good way, by the way. But before I get down, obviously, the natural cautionary statement, especially so in difficult times with COVID-19. I'm going to talk about the short to mid- and long term. Obviously, this is our view based on assumptions that we have. So this cautionary statement is coming handy in that kind of situation, obviously. So I'd like to share with you in a different way than we do it usually. Not just talking about the company and our future, but also a bit what just happened. As you, Tim so just mentioned, we separated our Upstream business last week, called ChampionX and I'll come back to that in a second. I thought it'd be good so since it's so fresh, ultimately, to share with you a little bit the rationale, the background and where we are, what it means for us as well going forward. Second is more midterm, whatever midterm means [ right here ]. We're all familiar. We've been impacted all of us. So for the better or the worse, depending on how you look at it, so staying at home, being closer to families, obviously, and further away, at least in person, so from all our colleagues and customers. But also so talking about how do we look at COVID-19 so in the next few quarters because it's really something that we see as something which is, as it's mentioned here, so more midterm than just a few months and then it's over. It's going to be a few quarters, and it's going to impact as well our business long term in a good way which will lead me so to our long-term opportunity which has just gotten stronger, which -- what's happening out there because the hygiene needs of digital solutions, expertise everywhere around the world. So it's going to be even more required going forward than it's been as well in the past. But let me jump in first on ChampionX. And it depends obviously how familiar you are with that business. So I'll give you maybe some background. Our Energy business for Ecolab was composed of 2 parts. The Upstream, which is the drilling of oil wells in production, which is basically so getting the oil out of the wells. And then we had the Downstream part. It's roughly $2.5 billion, the Upstream; $1 billion, the Downstream. $2.5 billion is what's been split, and the $1 billion of Downstream is what's remaining in our company. The strategic rationale in here, for a long time, Energy and especially Upstream, has been operating with a very similar model than the rest of Ecolab, of the company. This has changed increasingly over the past few years and has brought us to the conclusion that Upstream would be better off in a different environment and that Ecolab would be even stronger, remaining focused on all the businesses that are sharing the same model. That was the rationale of it. So it's really creating [ 2 ] better, [ 2 ] even stronger, more focused companies as well going forward. The type of transaction has been an RMT. That was the most beneficial so for the companies and for shareholders as well, and we've executed that. So last week on Wednesday. As you can see as well on the chart, so $2.3 billion in sales in 2019. There's a net cash payment of roughly so $500 million that went to Ecolab as part as well of that transaction, which worked really well. I'd like to underline as well the work that's been required for it. It's been 1.5 years of very diligent, thoughtful work on both sides of the companies, Apergy. So the old new company that's getting called ChampionX going forward and on Ecolab as well, and it worked really well. So 18 months of heavy lifting and really so successful separation that's been done operationally a few months ago, and financially and legally as well last week, has been good for both companies, operating well, good for shareholders as well. No red flag at all. Things are really progressing as we expected them as well to be. And last but not least, from a dividend perspective as well, no change as well. For Ecolab, so we will maintain our current dividend and grow it in the future as we've done it in the past, I think, 28 years. So it's really continuing a practice that we've been using so for many, many years. And for the ones sort of thinking that it's reducing our opportunity long term. This is not the case. One of our strategic drivers as a company, it's always to expand the pie, as we call it. It's basically so expanding the market opportunity that we have in front of us. As you can see as well on that chart, so in 1995, so 25 years ago, it was $18 billion. In 2015, over $100 billion, and 2020 ex Upstreams, so the new [ very matter ], $130 billion and we have 10% share of that overall market. And on the lower part of that chart, so you can see our competitive position as well. So blue being Ecolab and green being so the next closest competitor, and everyone else, ultimately. So really enjoying a very strong competitive situation, not just from a share perspective, but also in what we can do, serving 3 million customers in 172 countries in 40 different industries with R&D that nobody can match with digital technology, which is absolutely unique as well, is a position that we've been building over the years and that we count on leveraging, obviously, so going forward. So opportunity unchanged and approach unchanged to that as well. So that was the short term really, so being able to turn the page on Upstream, doing well in the new world. And Downstream really being part of our industrial business today. All that is done and behind us and worked really well. Second, let's talk about COVID-19, something that we all know. Obviously, it's something we didn't know much when it all started on December 31, 2019, in China. That was the first indication. So for us, we have a fairly large operation in China. So we've been experiencing that so first-hand very quickly. And we regrouped as a team and thought, how do we address that the best way. And the 2 things that truly came to mind so for us was, first, really remembering that everyone will remember how we've dealt with the crisis with the difficult times, talking about communities, our customers, our team and our investors. This is the way we've looked at crisis in the past as well. We've gone through many crisis over our 97 years existence as a company. And every time, we've become a bit stronger after those crisis. That's been true during the Great Recession as it was called. And we see the same during this time. It's impacting our company and our performance short term, no doubt about that, but we leveraged that moment to really build an even stronger proposition and company for the future. So bottom line, we're really trying to manage 2020 in a way that maximizes the future. It's not about Q2. That's not going to be good. Q3 either. The year is going to be okay, but the future is what's most important, and that's the way we manage 2020. The second thing is everyone is asking what's the time frame that we have ahead of us in here. Nobody knows. It's driven by the virus. It's driven by nature. There might be some new waves, maybe. Hopefully not. We don't know. So we don't know the timing. But the way we've gotten organized as a company, it's to really look at this crisis as a road map ahead of us, and moving from 1 phase to the other with the external environment. And those are the 4 phases that we're working with. As a company, the first 1 responding, and I'll share with you what we've done in here when it all started. The second, it's really so pausing and thinking how will COVID-19 impact our future, both from an opportunity perspective and challenges that it could create as well moving to retooling and then reigniting our growth as well with our customers as well going forward. So depending on where you are in the world, you're not in the same phase. China is probably more in the third phase. And the U.S. is kind of at the end of the second, moving to the third. It's not the perfect science as such. But it's had really the whole organization really so thinking in a structured way in an unstructured world basically how to look at this crisis that's out there. But if we go back a bit on the respond phase, which is an important one in here, was really driven by 3 things. It was protecting our company by making sure that we had enough cash. I'm going to come back to that as well, making sure that we were protecting our people, and then protecting our customers. So all 3: company, people and customers. As mentioned on the company side, was really making sure that we were setting ourselves up really, so maintaining always positive cash flow, and I'll talk a little bit more about that down the road, making sure, as mentioned, that we have enough cash. That's all done as well in a very strong and healthy position also to enter that whole outbreak. Protecting our people. It's all the things that we've all heard. In every country is different. The regulations are different. The situation is different. You see in Brazil today, a very different place than Germany, obviously, in Europe but really making sure that our teams were trained, got all the protective equipment that they needed, that they got all the support that was needed, and we've had a very high-performance rate in terms of how our people also have been dealing with that crisis over the past few months. And last but not least, really protecting our customers by being close to them, I'll mention that a little bit later as well, providing services. What we do as a company with our purpose of protecting people and the resources that are vital to life. While this is very well aligned with what's demanded out there by our customers. But at the same time, it's making sure as well that we help them financially. I'll come back to that as well in a second. So next part was really making sure that we could meet the demand in 2 parts. The first one was when the outbreak started, where everyone went high on sanitizing products, obviously. So to push down the road as much as possible to the closure of restaurants or hotels. And now that it restarts, it's the same thing. So we've been really working hard in providing multiple times, the standard volume that we are producing. So for sanitizing product for all the industries: health care, restaurants, hotels, manufacturing and so on. And second was really leveraging digital technology because remote control, remote servicing, well, has been a huge advantage during a time where people could not travel and many plants were not open as well. So for outsiders to come in, that was a good advantage that we have in here as well. Supporting our customers, well it was in many different ways. The first one was really sort to focus on emergency health care facilities. You've seen the pop-up hospitals like the Javits Center in New York as well. We've had really so set those up in order to really deal with the surge of patients that came in as well in as a safe way as we could, protecting patients, customers and our teams as well to do that. It's also providing new offerings to many industries, like the textile care laundry industry needed to have some products that were killing the virus on linen that were going back to hotels or to long-term care facilities as well. It was also -- especially on the foodservice side, the restaurant side, to help them financially. But it was kind of helping them short term and them helping us long term. So for all the lease programs when their restaurants were down, for instance, we suspended their payments, and in exchange, we've asked them so to extend their contracts for 3 months at the end. So from a cash perspective, same thing, but we could help them as well short term. And last but not least, it's really to help them reopen with an assessment of the situation, checklist on what needs to be done, providing all the programs and helping make sure that their guests were feeling safe when they're coming as well. And one way to look at our portfolio as well as a company is that we have businesses or end markets that have been touched in a positive way. That's on the right side. Hospitals, food and beverage, consumer goods, grocery stores, life science, where we really saw growing fast. And then you have on the left, the traditional restaurants, lodging, cruise, gaming and so on that almost went to 0 as we all know. Net-net, so it's negative, strong for Q2 and slightly for the whole year. That's more or less the way we look at it because of that. And if you look at that chart, which is directional, we've kind of bucketed our company's portfolio in 4 buckets, kind of the first one demand plus, as you can see. So roughly some 25%, 30% of our share of sales basically growing much faster. And then you have the ones more or less the same, and then the one with the demand depressed. So it gives you a little bit an idea on how we were looking at our portfolio, and it's turning out pretty accurately in reality now that we are much more advanced during the crisis as well. Bottom line, Ecolab, well-positioned both from a health perspective and strategically to help customers as well do better. And we know that, that's difficult times, that will pass, and it will just make us stronger going forward. So let me talk some about the long term of the company now that we've talked about the short and the midterm. There is really been a better time so to be in a business that's positioned on safe food, clean water and healthy environment. Those are long-term growth trends that we've chosen many years ago and that we've refined as we went. And during phases like this one, well, have just gotten stronger, which is good for everyone, for our customers, for us, our investors and for nature as well so for that matter. Our markets keep being large, as you've seen, $130 billion of market opportunity. If you look at it by end market, on that chart, green is the size of the market, blue is who we are. Basically, those markets can move, so growing or declining, while our first focus is to get more of the green, which is basically expanding our shares. You can see in all of the key industries that we serve, we have a lot of shares that we can still gain, which is good. Then we are helping our customers so becoming safer and more sustainable, preserving as well natural resources and protecting the environment. This is important in what we do for our customers. This is important for what we do within our own operations as well, on how we manage natural resources, how we protect the environment, our focus on safety for our people as well. And really from a governance perspective as well, making sure that we are as well set up as we can. And we've been so awarded so many times for what we've been doing. This is not what is the most important. It's to be a good example for our customers and for our teams in what we're trying to do for our customers, which are, for the most part, large companies out there. I would have pages and pages of all those great companies out there that we serve for, in many cases, for decades. As well, McDonald, we've been working with them for 50 years. So those are long-term relationship, started many years ago and are going so to be lasting for many years as well going forward. And interestingly enough, even if we have long-term relationship with those large players, ultimately, as you can see on that pie chart in here, the $13 billion of the 130 -- well, $45 billion is business that we could do with customers that we do on one side. Think about, so we would do sanitation products for 1 customer, but they don't use pest elimination. Well, those would be adds that we could add so to our portfolio to support them as well, which is easier and cheaper as well to do because we don't need to go into new units as well. Then it's interesting so for them from a value perspective as well because if the whole pie here is 100% of their cost of operating a restaurant or a steel mill or a power plant, what they invest with us is a small portion of their cost, but we impact all their cost, which is how we drive value for them. And the more they invest in what we do, the better off they are as well. And in those times, just to give you a few examples of the innovations that we have as well, talking about food safety in food retail, like a Walmart, like a Target, like a Kroger, you name them, ultimately. Well, those operations needed even more food safety platforms, making sure they have the right procedures, the right standards, the right checklists. All of that is digitally enabled as well. So with MarketGuard 365 and one of those global companies, so can have an understanding of the food safety profile at anytime, anywhere around the world as well because it's also remote monitored, which is a great example that's been very useful during this pandemic. But when we think as well in terms of infection, it goes beyond COVID-19 as well. It can be legionella as well, which is spread usually with sprayed water. It can be a fountain, it can be a shower, it can be a cooling tower, wherever water is in the air, the risk of being so infected with legionella is there. And it's a deadly infection, unfortunately, as well in here. Well, we have digital applications that are helping predict where it's going to happen, in which hotel, which part of the hotel and how to deal with it in order to make sure that the guests do not get infected. If it's a hotel or if it's a plant. It's the same thing as well in here. And by predicting, we can improve 8x on the efficacy of our work and reduce the cost of our customers in case they would have a legionella incident, as you can see. So usually, it cost $8 million, roughly. That's an average number of how much it cost from loss of revenue because they need to shut down their operation. And it's between $2 million and $3 million from a legal impact as well that they have. So when there is 1 incident happening, it's usually roughly $10 million. And at a fraction of that cost, well, they can be protected as well as much as it can get. Another example, moving further away from what we're familiar with from COVID, from food safety, from legionella, is also making sure that while we do that, we do it in a way that's preserving natural resources. And I'd like just to share, we usually don't share so customer stories such except if they agree and approve that, and ADM which is a big so food trader and manufacturer in the United States will be part of our sustainability report, so we can share that so with them as well. We've provided them so with water management systems, which helped them reuse the water in their operation, reusing the same water at the high-purity level. And as you can see, it's helped them so reduce their water usage by 2.3 billion gallon water. That's an equivalent of the drinking needs of roughly 8 million people. And just for perspective, this is roughly what our company uses in terms of water. With 1 customer, we could so kind of neutralize our own need as well. With that, we could help them reduce energy because it's hot water or cold water that's being reduced, reduced energy, reduce CO2. This is a positive financial impact. And as you can see, roughly $28 million of savings on an annual basis for an investment that is a fraction of that number. So high-return for customer as well for that. Bottom line, in a year, our scope is fairly broad. As you can see, so we had produced almost half the milk that's being produced around the world, almost 1/5 of the food that's being produced in the world. And we help, ultimately, so our customer save, for instance, roughly 200 billion gallons of water versus 2015. This is the equivalent of roughly 750 million people drinking needs on an annual basis. So it's a big scope with big impact driving very positive so financial results for the companies that we serve. Let me conclude on a few things because this is where we're going. This is our long-term, so driving forces, but also from a financial perspective, so we're in a very strong place. And it's especially important during those times. You can look on the left side is the cash flow that's being generated by the company, very strong. You can see that, so pre-Nalco transaction on the left, '08, '09 and then fast forwarding into '17 and '18, with nice growth in '18 of 12%, 20% in 2019 with $1.7 billion of free cash flow. So a high cash-generating machine. And on the right, was really making sure we had enough cash, $1.7 billion. As you can see in here, maturities are being well spread so over time as well. So in a very comfortable situation. We've made scenarios as well to really understand what could be the worst situation and even in a worst case, we would be cash flow-positive, which is where we wanted to be as such. This is a good cash machine as well for shareholders, for investors. You've seen that over the years. It's almost $9 billion cumulative cash returns. So over 10 years, both in share repurchase and in dividends as well to shareholders kind of half of $5 billion and $4 billion. As you can see in here, with dividends growing every single year since 28 years. So for a very long time, and nothing's planned to be changing as well in the future. So in summary, 2 last charts. The first one is that yes, difficult times right now, difficult for everyone. We're not immune to that in our businesses like in hotels and restaurants. So short term, we're going to be impacted, obviously. But long term, we see that as a strengthening of what we do for our customers and the communities as well out there. So our focus on cleaning and sanitizing our investments in digital, in people, in technology as well. So positions us in a very unique way to win further in the future. So in other ways, it's not changing the direction of the company. It's accelerating the progress towards that direction that we've been choosing. And in summary, we are so fortunate enough so to be competing in a market that's large. You've heard $130 billion, a market that's growing because of food safety or public health, all the elements that we've been talking as well. We're strong -- we have strong fundamentals. We have a healthy balance sheet as well, which helps. We're serving the largest customers as well out there, really helping them produce better products with less natural resources and a reduced impact on the environment, which is also helping them improve the P&L at the same time. So good for customers, good for the environment, good for us, good for shareholders. So a pretty cool story overall. So with that, Tim, I'll just pause here and opening up so for questions for the last few minutes we have.

That's great. Thank you for that rundown, Christophe. That was a great presentation and a good update on the business. Thank you. With a little time left, I've got a few questions coming in. Do you mind if I just throw a couple your way?

Absolutely.

Okay. So the first one, as we're thinking about the institutional business, I believe this is one of the segments, like you said, that's most impacted by the pandemic, but I think it probably varies by geography. Given Ecolab's position as a global provider, are you seeing different levels of impact across the different countries? And can you talk about the differences among regions? Maybe those that are stabilizing, those that are improving. And if there are any that are still more of on a downward trend.

Yes, great question. The world is obviously a different place, depending on where the pandemic started. It really is a ground zero was Wuhan in China. That's where we've been impacted the earliest the most. And in China, we see -- so the bottom has been reached a month ago roughly, and it's back on the way up. Restaurants coming back fairly quickly. Hotel occupancy, taking more time so to go up. It's roughly 40%, 45% of occupancy right now versus the 80%, 90% that they have so pre-COVID. And then you move so further west, in Europe, that was the next one so being impacted. They are kind of reopening the last 3, 4 weeks, some not completely like Spain, but Germany completely as well. So Europe is a bit of a patchwork over there. And we're familiar with the U.S., where it's kind of a few weeks behind Europe, but in a similar pattern as such. And then you have the ones that are getting into it, Brazil being the most obvious case, not managed especially well. So from a country perspective as such, so let's see what's truly going to happen over there. So every place in a different place. But what's good for us is that we could learn from every of those geographies in order to be better in the next one.

Got you. Okay. That's very helpful. One more question is probably all we have time for. And this comes to us from Nate Brockman, a former analyst of Ecolab. He knows the business very well, and I thought he had a good question. He says, as restaurants come back -- come back on with limited seating, is there an opportunity for increased spend on Ecolab products to meet compliance? And does that, do you think, offset the lower capacity if they have to spend more to keep their restaurant up to the elevated hygiene standards?

The key question is the time in here. So many restaurants -- and you see many numbers in the newspaper saying 10%, 20% of the restaurants are not going to make it in the U.S. in that case, probably true elsewhere as well around the world. But in an industry as well that is known to be churning quite a bit as well. So it's not completely unusual. It's just a bit more extreme as such. So we think it's going to take a year-plus for most geographies to come back to where they use to be. So during that time, hard to tell exactly how it's going to be. It's going to improve sequentially. How quickly? Is it going to be a straight line? Probably not, what kind of line? I don't know. But it's going to improve over the next few quarters so for sure. Ultimately, the spend will increase because the safety hygiene standards are growing because you and I, so the guests of those restaurants and hotels are expecting more from those places. You want to see the cleaning happening. You want to see safe. You want to see sanitizing products. You want to really have a physical presence that's showing you are in a safe place over there. And the second thing is in order to protect the guests, well, the risk of infection is always depending on the weakest link. If you have 1 person in the restaurant not behaving the right way, if everyone else is doing it the right way, well it's not going to be good. And that's why it's important to have even more of our services within a restaurant in order to be as protected as you can to protect your guests as well as you can, too.

Understood. I think that's a great place for us to end here, a good note to end on. I want to thank you again for your time today.

Thank you so much, Tim. All the best. Stay safe.

Same to you. Take care.

Thank you.