Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Please.

Okay. Great. Thank you, Andy, and thank you, everyone, for joining us today. Looking forward to sharing our growth story. I'm Christophe Beck, President and Chief Operating Officer of the company, and we'll be talking naturally about where we are and where we're going. You're familiar with the cautionary statement. I'm not going to read that whole thing obviously. As such, you're familiar with the standard practice. Maybe for today, obviously, some of you know us better than other. So I've got to try to be as broad as I can but as well as covering a few topics in a deeper manner. And I'm going to start with Q3 2020, which we published a month ago, and the situation with COVID, which has been a very interesting journey for us in 2020, so being more short term. And then afterwards, opening up and talking about our long-term growth opportunity and why we believe that as hard COVID has been for so many around the world, it's been actively actually a good thing for Ecolab and for its future. So starting with 2020. The first thing is kind of rewinding a bit the tape and starting at the beginning of the year. When COVID started in China on December 31, 2019, this is the first time that we truly experienced it and that our teams and our customers really based the truth in Wuhan of what was happening with COVID-19, obviously not knowing all the details and what it would mean. What it meant for us when we got together as a team and facing the reality in China was really to regroup and to say, "What are our priorities?" And we've been very clear for our 50,000 people that our #1 priority will be to take care of our customers; our second was to protect our team; and our third one was to protect our company and our shareholders obviously, which has been a great framework for us to really go through an unpredictable time over the past few months. Now in hindsight, we know much more; obviously, we did not at the beginning of the year. And it was really this absolute commitment of saying we're living history. And we really wanted to make sure that our customers, our team and our shareholders will really remember of 2020 as a time where the companies stood for everyone and really delivered as promised. The second point was really to think about what's right for the future, for our customers, for our team, for our company. It was not to manage the upticks of 2020. It was to do everything that's right for the longer term, which means 2021, which is closer now obviously and beyond. And I think it was really the right choice that we made because we can see that all we've done in 2020 will ultimately benefit our customers, our team and our shareholders going forward. And it's really making sure that we can keep our terrific track record of double-digit EPS growth that we've been delivering for decades now, as you can see as well on that chart, and really making sure that we are always up in the double digits. As you can see, it's up 12% over 15 years, but it can be 11% as well for 1 year as well. And if you exclude as well the Upstream Energy business that we split in June this year, the EPS growth has been 12%, so over 1 year, which is even better. We want to keep driving that story as such. If you look at shorter term, in here, that's been the case in 2018, 5% organic sales, 12% EPS growth. You can see 4% in 2019 and 12% EPS as well. And Q1 2020, a slight slowdown in sales, which was impacted obviously with the situation in China since it started a little bit early on but EPS as well in the double-digit range. When Q1 started and that we experienced the first impact of COVID-19, we really regrouped and not only declared what our priorities would be in terms of protecting our customers, our team and our company, we also provided our team with the road map towards recovery. There was no way we would know how long it would last. We still don't totally know obviously, a little bit more after yesterday in terms of vaccine development. But we wanted to have our team really very clear on what are the basis that we're going to go through. The first one, really responding to the immediate threat with the 3 priorities I just mentioned. The second was really to rethink, which was to step back and understanding what are the new opportunities for us, what are the risks that we might be facing, how can we leverage this time ultimately to come out of COVID-19 in a much stronger position. The need to retool, I'll come back to that when we talk about digital, for instance, as well. The work we had planned for the next 2 years, we've done almost in 2 quarters ultimately in here. That's what I mean with retool and ultimately moving towards this reignite phase, which is the phase that we're in for the most part right now, but the framework and a set of priorities that was very helpful by our teams and as well our customers. Then when we think about what happened after Q1, Q2 we knew would be the lowest point. And as you can see in here, 14% sales decline and 49% EPS decline as well and then moving towards Q3 with a halving of the decline both at sales and at EPS as well, which is basically what we had assumed, saying Q2 would be the lowest point, vaccine would come in the first quarter of '21, would take a few quarters in order to be rolled out globally. Interestingly enough, those assumptions are becoming more true than we thought even initially. And that's showing basically or driving the improvement as well of the performance quarter-over-quarter when we look at Q3 versus Q2. So when I look at Q3, the good news in here is that our new business generation, which is our main driver for growth obviously as a company by having more customers buying more programs from us has remained very strong and stronger than what I even thought would happen because of COVID. When I look at our new business pipeline in 2020 versus 2019, way stronger than what it used to be in 2019, which was a very strong year. So for Ecolab as well, this is a very good news. That being said, it takes time to install obviously this new business in a COVID environment where the safety plays a big role obviously for us and our customers, takes more time, but this is all good news for the mid- and long-term as such as well. We've seen as well that our new products and programs, especially some around antimicrobials, infection prevention, are showing extremely strong growth, which is very encouraging. This is not something that we started to develop in 2020. This is something that we've done over years/decades as well, and I'll come back to that a little bit later. And ultimately, as we can see, we have 3 major business groups or reporting segments as well, with Healthcare and Life Science having an exceptional performance with 29% sales growth and 81% income growth as well. Industrial was slightly off at top line but strong income growth as well, 18%, as you can see as well on that chart. And then Institution and Specialty mostly, so hotels, restaurants and retail stores declining in Q3 but improving very nicely from the second quarter of minus 36% to minus 22%, so a good recovery as well, so quarter-over-quarter as such. And what's most important is to look at basically that we have one front war, if I may say. The Institutional division that you see on the left is 20% of our company. This 20% hotels and restaurants, as mentioned, so went down to 28% at sales and operating income saw 89%. But 80% of the company went up 3% organic, 14% in terms of earnings growth as well, which led to the minus 6% and minus 22% at fixed currency rate, as you've heard as well before. So 80% of the company doing extremely well or well and 20% mostly impacted by hotels and restaurants closure. But as you will see, so good progress on that front as well. Because if we take the longer-term view for Institutional U.S., which is the strong hotel and restaurant business that we have in this country and if you look at the last 20 years and you can see the growth pattern that we've had here, it's in average so in the middle single digit. As such, you can see in 2009 during the great recession, we went down only, if I may say, 3% and up to 30% so year-to-date in 2020. But this is providing confidence that once we pass COVID-19, we will be back to the type of growth that we had in the past and probably even better because the hygiene standards will be higher at that point. If we look at the restaurant and lodging segments, they're all recovering from the low point in Q2. Q3 has been much better, but we know that Q4 might be slightly better than Q3 but not a dramatic improvement versus what we saw Q3 and Q2 because of all that we're reading as well in the newspaper. As such, Q1 is going to be as well a bit better than Q4, but I don't expect a dramatic improvement from a market perspective and then afterwards an accelerated recovery as well in the quarters to come post Q1. The most important part is, basically, are people going to go back to restaurants at some point? I think on that chart, the most important 2 lines to look at is, first, yellow line, which is basically so the food being bought from grocery store, which means that you cook at home. As you can see, so it started kind of 60%, 65% in early '90s and went down towards less than 50%. And then you have this brownish line, which is basically the out-of-home restaurant eating or takeout, basically, where you can see went up and overtook the in-home cooking, dining as such. During COVID, we had no choice than to cook at home and eat at home because that was the only option. During the second quarter, things are changing again. And I'm absolutely convinced that the long-term trends of the last 30, 40, 50 years ultimately will come back where people are not going to start cooking at home anymore but will go back to a restaurant, as we've always done and even more in the future than we've done in the past. So a very steady industry. We believe in that industry. We've lived with it for almost 100 years today. We're extremely profitable in that business as well, and this industry needs us more than ever. Those are all good news obviously for us. How do we look at the future for Institutional? Well, first is for restaurants, we expect a recovery back to more normal, which means 2019 type of level during the second half of next year. And lodging will take a little bit more time, '22, because it's 2/3 driven by business travel, which is down 90% right now. Well, that's going to take some time to get back to 100%. That's why we believe the industry is going to be back to where it was in '19 sometime in 2020. Our performance will get back to '19 before that, for sure. And our profitability performance in the Institutional will become better than '19 even before that. So we kind of think a year from now, we should be back to a much better place. The second thing is that the hygiene standards are going to go up. How much up it's going to be pre-COVID? We will see it's going to be higher than where it was before COVID and probably lower than what it is right now because we are in an extreme place today in order to make sure that we don't get impacted as well as such. But the fundamental themes for our customers do not change. It's really helping our customer to produce more products, less -- more products, better quality at a lower total operating cost by using less natural resources like water and energy, which are all high on the agenda, all have made big commitments on it and have the need obviously to reduce their total cost. Same time, they need to make sure that we would be safe as well, not that people get infected differently than with COVID as well. And Healthcare and Life Sciences have really reached an inflection point during COVID-19, which is good news basically for this business, performing extremely well and that we performed well as well past COVID-19. So overall, what it means in terms of focus for us, well, it's total focus on our customers, really making sure that we drive our competitive advantage in terms of how much expertise we can provide them. We have over 1,000 people in research and development supporting our customers to understand what is COVID, how to address COVID and how to get better post COVID as well. Accelerating antimicrobial innovation. I'll mention a few innovation as well in that field. Accelerating our digital investments for the good of our customers and for our cost structure as well. Making sure we have enough capacity, which we don't right now in terms of sanitizing program production, hand sanitizers, foam sanitizers and all that in high demand obviously and really making sure that we keep developing our programs that are preventing infections in our customer sites, which lead me to Ecolab Science Certified. You've probably seen it as well on TV, which was really driven by a few things. The first one is that we know that our customers' customers, the guests ultimately would go back to restaurants and hotels only if they would feel it's been disinfected, so the right way by the right programs. Second, they want to make sure that it's been audited and certified. And third, that it's using hospital-grade programs in order to disinfect. Those are the 3 core elements of Ecolab Science Certified. The thousands of restaurants and hotels have been certified in the past few weeks ultimately provide you that peace of mind, which is supporting the industry and, by definition and afterwards, our business as such. So that was the short term. So unpredictable interesting year 2020, but for us, we've seen that as a huge opportunity to accelerate what we had in our plans anyway. So let's talk about the future, starting with me. I hate to say it a little bit that way. We've communicated as well a few weeks ago that Doug Baker is going to step down after 16 years as an exceptional CEO at the end of the year and will become Chairman of the Board, and I will take over on January 1. And I'd like really -- so for you, if there's one thing that you remember from this is basically that it's going to be a continuity of what you've seen over the past 16 years. This company has done extremely well, has evolved in a very changing environment. We are in a very strong position in terms of competitive advantage, in terms of team, in terms of customer relationship and in terms of what we do and the culture that we have as an organization. This is not going to change obviously going forward. All that you've seen and all that you'll see are things that Doug and I have been developing over the past few years, over the past few months as well. And we will keep talking as well going forward because we've had this very close, great relationship, almost ideal such as well for that. My focus, well, will be on the similar things that you've seen so far but with an increased attention on customers, on growth, on building our team even further and on accelerating digital technology, which has been such a great driver of our performance over the past few years and the past few months as well. Back to the company in here. We are in a unique place, serving 40 different industries out there but with one common platform that's delivering value, where we really bring together technology, chemistry, information, training as well to our customers in a very similar way with very different experts obviously if you're in a hospital or in a power plant or in a restaurant as such. We use common standards and platforms of hygiene, of antimicrobial products as well, similar technology as well. The business model, as mentioned, is the same. We leverage a lot of our technology and digital platforms as well, and 90% plus of our sales are driven by recurring revenue, which means consumables that we're selling to our customers, so razor blades while we provide the razors to our customers as well. This is a proven model that we're expanding in all the new industries that we are entering as well. The market trends are very positive for us. They haven't changed with COVID. If anything, they've gotten stronger. The population growth, we're going to be 25% more people by 2050. That's 1 billion more people eating more, traveling more and increasing the infection rate. To be honest, in here, this is what we do. The middle class is growing with people consuming more consumer goods. Obviously, this is a good thing. Population aging, this is kind of driving our hospital and Healthcare business and Life Science as well, which are high profitable business as well. Technology, people are expecting new digital connection, having real-time information, global real-time data. This is what we can provide. And last but not least, climate change is not going anywhere during COVID-19. If anything, what we see and hear from customers, this is becoming even higher on their agenda, which is part of what we're delivering as well. We have a great competitive situation. We serve a $135 billion market. It's a total addressable market that's kept growing. As you can see on that chart, we're 9%, 10% of the market. And on the bottom part of the chart, you can see some Ecolab in blue and all our competitors in green out there. No one is coming even close. There is no one-to-one Ecolab competitor out there, it's industry by industry. And that's the reason why it's all fragmented. If we look at our end markets, starting with restaurant, the first one, and then Food & Beverage, if you go down the list out, Healthcare, blue is Ecolab today, green is the available market that we have out there. We have plenty of room to grow everywhere where we look, which is a very good thing. And the most important part is that this $135 billion, which is the chart on the right ultimately in here with the $13 billion in yellow that we do today, well, the red part is the most interesting one, the $49 billion in circle the customer. Put in simple terms, it's basically customers with whom we have already a relationship but they don't buy everything from us today. As you can see, driving penetration in existing customer is, by far, our biggest source of growth. And it's also interesting from a density perspective because when we go to that same unit, selling more products, obviously we increase our profitability, which is a very good purchase cycle. And that's one of the reasons why our margins are improving as well year-over-year. We also want to make sure that our own operations are safe, are sustainable in terms of how we manage our clients, our logistics, our products, reducing obviously our usage of natural resources, making sure that safety remains at goal 0, which is our ultimate core objective as a company. And we've been recognized by many institutions out there for the way we run our business and what we do as well for our customers and the broader community out there, which has led us as well to a very unique relationship with 80% plus of the major brands out there. Most of them, we've had relationship for 10, 20, 30 years as well, which is really a sign of how much we've built a strong partnership with our customers. And they stay with us because every year, while they deliver better results with less impact on the environment and a better impact on their own P&L as well. And why not is that if we look at the total cost, ultimately, as you can see on the right, including labor, maintenance, natural resources that they use, asset retention and so on. The spend that they focus on Ecolab products is de minimis. It's usually less than 5%, impacting 95% of the total cost. By improving or investing more on the 5%, they improve the 95% way more, which is basically the more you invest in what we do for customers, the better the outcome as well for customers, which is one of the reasons why pricing has always been positive in our organization. Now talking about digital in here, which is a new pillar over the last few years, which we started 30 years ago actually in Europe, well, is helping improve the capabilities of our 25,000 people sales and service force around the world by helping them provide 24/7 remote monitoring for thousands of units around the world out of our system merchant center in India. We provide predictive analytics for all those sites so that we can know in advance what's going to happen and reduce basically the risk of failure at a lower cost because we do something beforehand. We can provide virtual service with experts anywhere around the world and give all our teams the knowledge of that customer that Ecolab is having anywhere around the world at any site as well. This is driving value and it's reducing cost as well, which is all good. Supported by great innovation, I'll just give you a few examples in here. In food service of our restaurants, we've launched 2 weeks ago the first sink and surface cleaner sanitizer that kills the COVID-19 virus in less than 15 seconds. There's none around the world that does that work as quickly as this one. You don't need to rinse, so it's extremely effective. You can sort of change the tables in your restaurant much quicker. You have less waste as well that's being created. You don't have to rinse. You have less packaging as well. It reduces your cost, improve the guest safety profile and it's a good thing obviously for us. What we do for food retail, grocery stores, Walmart, Target and so on, ultimately, we have a very good program called MarketGuard 365, which is, in real-time, helping every retail store that we serve around the country and around the world, basically understanding what's their food safety risk, where something needs to happen, either to close a store if something dramatic is happening or making sure that we can deal with it and keeping the guests as well in a safe place, improving customer satisfaction and reducing cost. Also in our industrial world, reducing the risk of Legionnaires' disease. Cooling towers spread water, water that can be dangerous. It is Legionella in there. Our chemical programs, technology and predictive analytics help our customers make sure that, that doesn't happen. And if we see the risk comes up as well, we can deal with it and making sure nothing happens around the plants, all the hotels, using those cooling towers and our technology as well. And last but not least, while do we do that, we help as well our customers like ADM here in that case, save a lot of money, a lot of water, as you can see. So last year, we helped them save over 2 billion gallons of water and $28 million of cost by an investment that is a fraction of that saving as such in here. So good for the environment, good for people and good for the customers' bottom line. And I'd like to close just on a few things, talking about our reach as well and how much more we could do. When you think about it, we are touching today roughly 1/3 of the world food production, 44% of the milk that's being produced, 20% of the world's power that's being generated as well or 40 billion hands, which is quite relevant right now with COVID-19. And last but not least, we'll help our customers save 206-billion gallon water in 2019, which is a drinking need equivalent of 700 million people on our path to deliver enough for 1 billion by 2030. So a great ESG agenda that is driving great financial performance as well at the same time. Talking about financial performance, the way I look at it, it's a great growth machine, but it's a great cash and return machine as well at the same time. For 28 years, we've increased our dividend, adding up to $4 billion dividends to shareholders and between '29 -- in 2019. So we've repurchased $5 billion as well of share. And as you can see on that chart, it's basically the money that we've given back as well to our shareholders as well, so almost $10 billion over the last 10 years as well as such. So in summary, during COVID-19, it was not expected obviously in our strategic plans. We've leveraged that opportunity to increase our long-term opportunities to put us in a position of strength where we have better product, better programs, better trained people in a way that we can support our customers during COVID times and get even better post-COVID time. So at the end, the Ecolab story, which has been running for almost 100 years now, 97, to be precise actually here, will be continuing with 135 billion. So a growing market that is out there, highly profitable, generating a lot of cash and in a position that is very far away from what any other companies can provide as well out there, with a team of almost 45,000 people, of which 25,000 are serving 3 million customers in 170 countries on a daily basis, which is a footprint that's really a point of focus for us, a point of pride as well, making sure that it's the best ever supporting all our customers around the world. So Andy, that brings me to a close, and I turn it back to you.

Yes. Well, it looks like we're out of time. Perfectly on time there, Christophe. Thank you so much for the presentation, the entire Ecolab team for coming again to the Baird industrial conference here. Just as a heads-up, I wanted to give everybody what's next for the conference. We've got GMS, Knowles, The Toro Company, Badger Meter and Autoliv presenting in 5 minutes. Thank you again, Christophe, for the presentation, and we'll talk to you very soon. Bye-bye.

Thank you so much, Andy.