Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Next up, we have Doug Baker, the CEO of Ecolab. As I'm sure most of you are aware, Ecolab has a unique story that touches on several secular themes in the COVID world, including various forms of sanitization, hygiene and pest elimination, not to mention how it's integral to conserving one of the world's most precious scarce resources, water. It's natural that pieces of the Institutional business are a little under pressure due to the lockdowns, but today the forward focus is now on the increasing probability that Ecolab exits this pandemic an even stronger platform with secular tailwinds to benefit profits for many years to come. There's one thing I also know about the Ecolab story is that the organization is far from complacent, and they are making great strategy of new products, innovation and customer programs to further drive the bottom line. With that, I'm going to turn it over to Doug. He'll have a brief presentation, and then we'll do some brief Q&A. Thank you.

Thank you. So it's great to be with you. I wish it was in person as opposed to virtual. It would help our hotel business. So first, we'll lead with the cautionary statement. You've seen it. It's one of the best. And let me just walk through 2 main points during this presentation. I'll talk a bit about Q2 and COVID's impact and expectations going forward and, most importantly, talk about long-term growth opportunity that we see, part that preexisted COVID and some enhanced by COVID. So first, Q2. Moving into this year, we have had strong performance for a number of years. And if you look to the chart on the right, obviously, double-digit growth was a consistent story for us for a long period of time. And last year, we've reported 11% following a 12% the year before and 12% if you remove down or upstream energy, which we spun off in June. And importantly, as we entered this year, we were in good shape with accelerating business if you look through last year through the quarters. In entering Q1, we're in -- we felt very strongly positioned and ended up delivering 13% EPS growth ex upstream. Then obviously COVID hit. And COVID really started impacting us at the very end of the first quarter. And we knew that it was going to be a sizable event, frankly, because we saw a simultaneous global shutdown, particularly in lodging, foodservice, in some industries that we served. So we went into response mode quickly, trying to understand how are we going to manage this? What does this mean for the business? And quickly came up with priorities around taking care of customers, taking care of the team, and making sure we also took care of the company. And we wanted to manage with the end in mind, i.e., capturing unique opportunities that COVID was going to present but also continuing to invest in what we knew were big bets and were going to outlast COVID or be enhanced by COVID. And fundamentally, the way we want to manage this here is really with a goal of maximizing Ecolab's post-COVID position. So we've put out to our team 4 clear phases, and this just was helping the team think through opportunities and also, if you will, not get sucked into the fog of war, which is the natural inclination, particularly when you have something this dramatic hit the business or the economic situation. So clearly, one, what do we need to do to respond but also make sure you create time to rethink what has changed and what hasn't changed so that we retool in the proper way and ultimately get into a position where we can help, if you will, accelerate the recovery of certain of our industries and of our business in particular? So Q2 we knew was going to be a dramatic impact. And as I said on our Q2 earnings call, we really did nothing to try to minimize the impact during that quarter because, foundationally, it is what it was. And what we wanted to do was make sure we were thinking through steps that needed to be taken in the quarter to position us properly moving through COVID, if you will. And that was really the focus. So we accelerated investments around digital. We did a number of acceleration of rollouts on antimicrobials. We took steps to increase capacity on sanitizers and hand care programs, et cetera. Those are the steps we were taking versus trying to minimize, if you will, some sales damage, which just is going to exist as a consequence of shutdown. So we had 14% down on the top line and a whopping 49% reduction in EPS, which was a sizable reduction, for sure. Like COVID everywhere, the impacts were asymmetrical. We have some businesses that were enhanced by COVID. Life Sciences is up 53%. Healthcare was up 12%, and we forecast then that it was going to accelerate from there throughout the year. Specialty, which is really our QSR fast food business and food retail business, was up 9% as a consequence. Food and beverage, water and paper, if you will, kind of plus/minus. But then you had those that were impacted negatively, particularly institutional, which was down 50%, which we've never seen before, but really, I'll talk about why that was. And then you have the Pest Elimination business, which got hit quickly but is recovering in the downstream business, particularly around refineries, as gasoline sales and others obviously were curtailed dramatically, where shutdown was down 9%. If you really isolate the impacts -- and this is a chart which basically says, here's the Institutional division down 50%, with profits down dramatically. It lost money in that quarter. We do not expect it to lose money going forward. All other divisions were actually up fairly dramatically. Sales modestly, the profits up 30%, which really reflected a lot of the work that we had done in last year, getting ready for margin expansion this year, around pricing, around field efficiency, around plant efficiency, et cetera. And it came through in the first quarter and was coming through, obviously, as we continued into the second quarter. But then the total, it gets you back to the totals that I talked about earlier. So Q2, we said before and we still confirm, will be, we believe, the low point. And we expect sequential improvement moving through the second half, third being better than second, fourth being better than third. And Q2 is unique in many ways because the reason we believe we will see improvement is we believe, one, the underlying markets will improve. We've seen that. But number two, we also knew Q2 had a number of, I'd say, one-offs. One, the simultaneous global shutdown. While we believe we'll see rolling shutdowns continue for a period of time, you're not going to see literally all countries simultaneously down as we did in Q2 nor have we seen that. And I would say now we feel even more confident that that's true. Second, as a consequence of this dramatic shutdown, distributors immediately had to rebalance inventory, which means they chewed up their inventory and bought less from us even than consumption would indicate. And so that's a one-time, typically big event. And then, finally, we offered some industry assistance programs, which weren't cheap but we think were smart investments. They were around, frankly, trading rental machine payments for extension of contracts and others when our customers are going through a very, very difficult period. We generated a lot of goodwill and improved position coming out of this recovery as a consequence of the extended contracts, et cetera. So we believe that was a smart move. And then, again, I would just point out, we've got challenges, but really, they are focused principally on the Institutional business. And then I'll underscore because there was some chatter at one time that Institutional is suddenly this business that is cyclical, that's really not borne out by the facts. What we're dealing with is a very unique circumstance. When you have a pandemic which shuts down industries, you're going to have outsized impact. When we went back and looked at the last 20 years, there was only 1 other year in which we had negative sales, and that was 2009, the Great Recession. Other than that, even through other recessions, like 2001, we grew, et cetera. And so this is a business that typically grows, sometimes faster in some years than other years, and we expect this to be the predominant profile of the business going forward as we move out of the pandemic. This year, year-to-date, we're down 31%, and it just shows what an outsized impact the pandemic has had on this business, in particular. Importantly, though, the recovery that we talked about we're seeing, whether it's in full-service restaurant foot traffic that continued in August, August was modestly better even than July; quick service restaurant, where we've had less impact on sales, also has seen continued modest recovery; and lodging rooms have improved as well, both in China and the U.S. in particular, but you're also seeing recovery in Europe. Now we don't expect this recovery to be overnight or to be a snapback. This is going to take quarters for us to get back to 2019 levels from an industry perspective. We expect to get back faster as a company because of efforts that we're going to undertake, which we'll talk about a little bit later. And then, finally, the long secular trend here we believe is most likely to continue post COVID, i.e., dining dollars or food spend had been shifting from home to away from home consistently for a long, long period of time. It has been significantly interrupted during this COVID period as a consequence of, one, fear and, two, availability. And as a result, we've seen a dramatic increase in grocery sales, which has benefited our food retail business, and a dramatic decrease in restaurant sales, but we do not believe that is sticky as some others forecast. The truth is given the share opportunity we have, we can be wrong here and still successful. But our belief is you're going to see this trend reemerge as COVID wanes or becomes smaller in the rearview mirror. So here's our view of post-COVID environment. First, the institutional recovery, we believe, will continue, albeit it will not be a snapback, as I earlier said. Foodservice will start seeing, we think, more natural recovery in the second half of '21 as COVID dissipates and fear dissipates, which means people will be more comfortable going out again, and we believe there's pent-up demand here. Lodging, we think, takes longer. And the reason for that is we think that business travel will take longer to recover fully as businesses reevaluate how they're going to spend their dollars on travel, in particular, now that we've used technology in different ways. I certainly can reflect on a number of trips I've taken that probably I didn't need to take and I could have used technology, and we'll plan to do so in the future. I am not the only businessperson thinking this way. So we think that just takes a bit of time longer for recovery. Both, we believe, are quite manageable. The other, though, trend is hygiene sensitivity. We believe it's heightened obviously now and we believe that exists post COVID. I think all of us are going to look differently at the person coughing and sneezing in the meeting room going forward. And so the sensitivity around hygiene, we believe, continues and moves forward. This is a belief that's shared by our customers. And you're taking a number of steps in trying to understand, how do they reevaluate processes to include heightened hygiene, not just for COVID but for post COVID as well. And then value sensitivity, we know during, if you will, sort of the rebuild period or the economic rebuild, will be a more sensitive subject for our customers. This is true always when we go through economic challenges. This is not bad for us. We've got a great value story. I'll talk about that and give you examples of how we do that further in the presentation. But what I'm saying is if we've led in the last year or 2 with sustainability and excellent outcomes, we're now going to lead with economic benefits, excellent outcomes and sustainability benefits. But we will now reprioritize how we talk about the economic benefits we bring to customers, which are quite sizable and are one of the leading strengths and the reason that we continue to grow share even though we're premium priced. And then, finally, the fundamental themes that we've been betting on around water scarcity, energy challenges, i.e., energy costs long-term increasing as we move to more sustainability, energy production, food safety and health care and life sciences as we have aging populations in the largest economies all are themes will continue post COVID and we believe will be somewhat enhanced as a consequence of COVID. So our focus: one, we've accelerated our antimicrobial rollout timetable this year. We had some great, great programs in place. We have moved these through. We've gotten coordination with regulatory agencies around the world. And we will have, we believe, best-in-class COVID and other antimicrobial claims very shortly. We've also accelerated digital investments. We call these good ideas no matter what environment you believe you're going to see post COVID. They drive, one, enhanced transparency for our customers so they can more fully see the economic benefits that we bring them; and two, they're the underpinnings for continued SG&A efficiency. Both are going to be vitally important, no matter what. So we have upped our spending there. We accelerated a rollout in institutional around the field technology platform as we had more time to do training, given, if you will, the absence of customer need for a short period of time. And then, finally, we'll continue to drive the Industrial, Healthcare and Life Sciences businesses. We're seeing very good results there. And we do believe we've got a unique opportunity to establish the awareness and further build the awareness of our hygiene advantage and also capitalize on a penetration opportunity by launching what we're calling Ecolab Science Certified program. This program is really designed to do several things: one, through improved protocols, improved products and improved programs plus thorough audit capabilities enable our customers to assure their customers that they are living up to the highest standards. This means we're using our hospital-grade disinfectants much more widely throughout our industries, which is one of our key advantages, if you will, versus many of the other either consumer products that are trying to move in and/or traditional competitive products. We're also merchandising the fact that we're doing this for customers and have talked about our consumer awareness programming with our largest chains and have huge enthusiastic yeses around this program. So we're going to continue to move and drive this. We believe this gives us an even stronger position post COVID coming out. Now let me talk just generally about Ecolab's position, COVID or not COVID. One, we have positioned ourselves around safe food, clean water and healthy environments. We believe all these themes have legs. I don't know -- whatever you believe on post COVID, people are still going to be all over food safety. Population is going to continue to grow. Middle class is continuing to emerge, and sustainability means food is going to ship long distances. You're going to grow where it's most efficient. Clean water and water scarcity has not gone away. In fact, we will say conversations we're having with customer around improving their resilience, which means preparing for water scarcity, have enhanced as a consequence of COVID because resilience is at the top of both executives and Board minds right now. And then, finally, healthy environments, both in Healthcare, Life Sciences, but broadly as a consequence of our ESG platform. So we chased a $135 billion market. Whether this is damaged by $5 billion or not will be an interesting exercise. But if it's $130 billion or $125 billion instead of $135 billion, it does not impair you when you have a [ 9 ] share. We have huge upside to continue to grow. And finally, if you look at our position versus competition, we believe that our competitive advantage is -- if anything, has been enhanced as a consequence of this period we've gone through. Our smaller customers, more cash-starved, debt-laden competitors have been hurt through this because they can't invest in the same way that we've been able to invest in technology and capabilities. And our customers understood how we could stand up for them and help them through this period in very unique ways that, honestly, competition was unable to do for them. So if anything, we believe our positioning here has strengthened, but opportunity broken down even further, more granularly by industry, shows that we have significant upside, or the blue. The opportunity is the green. So again, even if you shrink the green, we still have a lot of green to chase in foodservice, in particular. And if you fall down in the middle in lodging also, where we know there's going to be a slower recovery than in some of the other industries. We continue to focus on the largest customers. This has proven to be wise throughout long periods of time. And right now, even if you look at the impact in foodservice, it's predominantly on independents not as much on chains. And so as a consequence, this focus has buffered a bit of the challenges that we're going to be faced coming through COVID and out of COVID. But here, our story and our capabilities to offer globally -- global programs is enhanced when we focus on this segment of the market. We also bring to bear significant sustainability advantages. Embedded in our program is sustainable outcomes. So the more we sell, the more water and energy we save, and this is important. These aren't at odds. Too often, businesses end up by growing, producing more carbon and using more water. And as a consequence, they have to do offsets in some way to alleviate the carnage they're creating by growth. Ours is quite the opposite. And by weaving these together, what we've ended up with is this virtuous story that the more we grow, the more water and carbon we save globally, which is one of the underpinnings of our sustainability story and we believe will continue to propel a traction around the Ecolab growth story. And this particular part, sustainability, resonates importantly with the largest customers. And so we'll continue to focus on these players as we move forward and bring, if you will, the conversation that we have around how we bring benefits. So I talked about value sensitivity. Well, the way we go to market is talk about how our programs bring world-class benefits, be it in water management, food safety, health care outcomes, et cetera. We do it while also reducing water and energy footprints, which, in turn, reduces costs. So you end up with a story of best-in-class outcome at lower economic costs with enhanced sustainability benefits. And while we may during strong economic periods of time, where ESG pressure is at the height, lead with sustainability, we will now likely lead with economic benefits, which also translate into sustainability benefits. And we have had to make this pivot multiple times through different economic cycles, but we are in a very good position to manage. We typically gain share successfully through challenged economic cycles as we pivot to economic sensitivity conversations. Now increasingly, we are leveraging the 6-year spend that we've had in investment in digital technology. We are now over critical math. This is making a material difference in our ability to serve customers, bring clarity to the benefits we bring to customers and drive enhanced service while also reducing service costs. So we just went through the acid test called COVID, where we had to do a lot of service remotely that heretofore was done in unit. And we were very successful using virtual service in large food and beverage manufacturers, where we could troubleshoot using technology that's been embedded in these customers over the last several years. And the customers understand now the benefits. We've been pressured now in many of the customers, where we had maybe 1/4 of the new technology installed, to push the technology through the rest of their operations. That's the type of pressure we like. But our remote monitoring capabilities, predictive analytic capabilities and connectivity with our team through mobile sales and service apps has really enhanced our ability moving forward. So if anything, we are accelerating these investments because we know how powerful they can be, and we have big, big advantages here versus competition. So a few examples of how this has shown up in customers. So the first is what we call our MarketGuard 365 program. This program is positioned in the food retail business. Fundamentally, we took heretofore what customers did through paper, i.e., checklist of operational tasks that they need to perform, including food safety, and we digitized it, i.e., gave them a way to do this through a digital device as they go through. We collect and capture the data and, with them, start diagnosing and understanding how we can help them reduce labor and enhance safety at the same time. In one customer, which is 1,000 units, we ended up reducing $2.6 million of labor as a consequence of rolling this out. We are now rolling this out to a number of the large food retail customers as we move forward. But the data that we get here is invaluable. We can now understand a number of opportunities where we can help our customer further save money and operate more efficiently. And -- oh, by the way, it's going to take Ecolab technology to do it. So we view this as very symbiotic but important in helping both of our businesses. Legionella protection is another program that's been rolled out and will be enhanced further. This is now moving into new industries. We first rolled it out in lodging, but it's now moving into pharmaceutical and other places, where, obviously, there's zero tolerance for microbial risk. What we're able to do here through, frankly, AI and monitoring on water towers and other water situations, 24-hour a day monitoring capabilities, we can predict Legionella outbreaks 8x better than more traditional methods. So -- and this enhanced detection enables us to pinpoint and target outbreaks and do proactive measures to stop outbreaks before they occur. Now outbreaks are really costly. They're very problematic, and they're increasing as global -- as the Earth warms, Legionella outbreaks are going to increase. Bacteria likes warm temperatures. It does a much better job growing in warm temperatures. And so we've seen increases here. We know we'll continue to see increase. So our capabilities here are huge. And then an example in a traditional customer like ADM, which we highlighted in our sustainability report this year was really where we implemented water technology to reduce water consumption. In total, we reduced their water consumption by 2.3 billion gallons annually. When you reduce water consumption, you naturally reduce energy because you have to heat less water, move less water and treat less water, and that all takes energy. So less water means less energy. And in total, by reducing 2.3 billion gallons of water, we also save them over $28 million annually. So this was a significant win for our customer and obviously for ourselves because we ended up with bigger sales at ADM. But that's the type of outcomes that we create and why, even in economic sensitive times, we feel very well equipped to manage and grow share. So last year, in total, these are some of the outcomes. We saved over 206 billion gallons of water total for our customers. That's 100x more water than we use in our operations, just for perspective. So we have a huge outsized impact. That translated in 28 trillion BTUs of energy reduction. But importantly, we simultaneously prevented 1 million food-borne illnesses. While we process 45% of the milk supply, we touch over 20% of the world's energy production and make that more efficient, et cetera. So we have outsized impact, both on human health and on -- and also on the global health as we move forward. Finally, I'll just touch on financial position. This company has been a very strong cash generator. It will continue to be a strong cash generator. So on the left, we talk about pre-Nalco cash generation, post-Nalco cash generation. Most importantly, the bars continue to go up in the right direction. So we work very hard and make sure we pay great attention to how are we doing on cash flow because it is the most important metric in understanding, ultimately, business health. It's the one we look at as well as EPS, sales, OI and all the rest because we know then, are we really seeing this translate into cash generation or not. And we've been quite successful doing all of those things. We also have significant cash on hand. We've hoarded cash. We've done it specifically. We know the best way to manage through this crisis is not get into a crisis. You can be quite thoughtful if you know you can pay payroll. So we've been able, if you will, to manage for the long term because we're in a good cash position. And even if you look at our debt maturities and all the rest, we are well under control in terms of our ability to manage it and liquidity and all the rest is in fine shape. We are and will continue to be wise stewards of the money and will return cash, both through dividends and through buybacks, on a continued basis. We've done this on a steady basis since 2009 and a cumulative $9 billion returned to shareholders. We'll continue to find ways to intelligently return cash to shareholders. We will not need $1.3 billion of cash on our balance sheet forever. And so we'll find ways probably to reduce debt over time with some of that cash and also make wise investments and/or get it back to shareholders in a smart way. So in summary, we view our opportunities going forward as very, very strong. We believe COVID, net -- not all positive, but on net is going to end up to be a positive for this company. We plan to manage in a way that positions us favorably coming out. And then, ultimately, the story that we've had for a long time, great growth opportunities, a management team that knows how to execute, a great strategy around our execution, around growing with large chains in building out our portfolio, all these things have proven to be great cash generators. And we'll continue to focus on the key themes and the key strategies that have made us successful because we believe their legs are quite long. So that's what I've got. Thank you.

Great. Doug, thank you very much for your remarks. Just 1 of the quick things I want to get through, there are 2 main questions I have, 1 short term, 1 long term. But you're clearly not in control of your customers' reopening processes. And I thank you for the color you've already given. But given your customers aren't even really in control, can you speak to the conversations you've already had with your base? And also for those that have recovered, there are activities post reopening. Is it safe to say that sanitization product demand is up significantly? What are the types of -- what's the general dialogue you're having right now? And what in that gives you the confidence for future growth?

Yes. I think in -- let's say, consumer-facing benefit our businesses. This would include, clearly, lodging and food service but will also include food retail. There's a real expectation by their customers that they see tangible signs of heightened hygiene. I mean you see it if you walk into a grocery store today. You'll see different things happening. You'll see cleaning products quite visible throughout the store. You'll often see people wiping down carts. You'll see people wiping down conveyor belt after and in-between each guest. You'll see pads being wiped in self-checkout. This awareness and concern is going to, they believe, continue post COVID. Now will it continue at exactly the same level? I don't know that we can predict. But there is both actual hygiene standards that need to be met and then there's an element of hygiene theater. And I don't mean to be glib there, but customers want to see hygiene activities occurring. That's when they believe that they're occurring in the parts of the restaurant or parts of the hotel they don't see. So public spaces are going to be cleaned much more frequently and in a much different fashion heretofore. They were clean when customers were gone. You didn't see much cleaning other times. That's not going to be the case anymore. We think that continues. So yes, we would expect that you'll see a different standard there going forward. I would say then broadly, and then I'll move on, I think just resilience is a topic that's going on. And so risk mitigation and risk preparation is something customers are thinking about differently. And this even starts translating in different conversations around water mitigation and other challenges, too.

Great. And just the last one for me, but it's been an important one, especially among your shareholder base. But just can you -- you did this on a few slides, but can you speak to your ongoing efforts in digitization, food safety? And then also some of those other growing platforms that are really increasing your customer penetration and stickiness, it doesn't seem like COVID is really disrupting that too much. Just how should other investors or people assessing the Ecolab story be thinking about these platforms in the context of your future growth algorithm?