Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Thank you. So last but not least, it is now my great pleasure to introduce our last presenter. Christophe Beck was named CEO of Ecolab, a position he stepped into on January 1 this year. While new to the position, Christophe is not new to the company. After spending 16 years at Nestlé, he joined Ecolab in 2007. Over the years, Christophe has held senior leadership positions with several of the company's business groups, including overseeing the integration of Nalco following its acquisition by Ecolab in 2011. After working closely with then CEO Doug Baker, Christophe was named Chief Operating Officer in 2019. Ecolab focuses on cleaning, sanitizing, food safety and infection prevention products and services. The company works closely with customers, delivering programs and services to the foodservice, food and beverage processing plants, healthcare, hospitality and industrial end markets, among others. The company has 286 million shares, a stock price of $216.97, market cap $62.1 billion and an enterprise value of $67.5 billion. I will now let Christophe talk about the impact of the pandemic on its different businesses as well as his long-term vision for the company. Christophe? [Foreign Language]

[Foreign Language] Rosemarie, thank you so much. Great to be here. As always, honored to share our story, the Ecolab story. You're right, I've been not even 3 months in the job, but 14 years in the company. It's been a great journey. And we've done it together as well, Rosemarie, so we go way back for sure. So I need to go sort of quickly the cautionary statement. I won't spend any time on that. We'll be talking naturally about future mostly in '21 and beyond, which is the most fun part. Obviously, as such I will assume that you are all familiar with all that. But as you said, in a world that's been impacted by COVID-19, which was not part of our plans and anyone's plan in 2020, and climate change implications that have been accelerating as well, it's quite a good place to be as the global leader of hygiene, infection prevention and water technology and services around the world, a company that ultimately is not just doing good but doing well. And it's been the case for many, many years, as you will see and many of you who are familiar with our performance as well. That has been very strong and that has been extremely resilient in good times obviously, but especially in more difficult times like in 2020. I'll cover that in a second. When I think about '21, we've entered this year in a position of strength because of the work that we've done in 2020. Really thinking about what happened with COVID, not in a way that it's a negative impact on the company, somewhat, it was obviously. But really thinking how can we leverage that in a way that's positioning us in a stronger place for '21 and most importantly for the future. It's not going to change because of what happened with the Texas freeze a few weeks ago that was in no plans of anyone. Obviously, it's been unpleasant for us, for our customers, for the communities, the people who have been impacted by it as well. But for us, it's really a onetime event. It's a short-term impact. It's like a hurricane. It's a bit worse because it was unpredicted. And it's broader from an impact perspective as just a hurricane as such as well. But for us, it doesn't change anything. So to the story, it doesn't change anything, to the trajectory as well. And that's why as I will be sharing with you as well, everything that we've been saying over the past few weeks following our Q4 earnings ultimately hasn't changed if you exclude this event of Texas. And if I think beyond '21, which will be a year of transition for us and for many, well, I think that our position has just gotten stronger because of what we do and because of what customers need ultimately. But just looking a little bit back first before we go forward. As such, I always love to share that chart, which is not just a chart of performance of double-digit EPS performance over the past 5 years, 10 years, 15 years, whatever is the number of years that you want to consider. But it's especially true during crises times, being 9/11, which was before that chart, but has been a strong time as well for the company. It's been true for 2008 and '09 during the financial crisis, during MERS, during SARS, and obviously what's happening with COVID-19 especially in 2020. We see those challenges as a company has an opportunity to learn from it, to provide new solutions to our customers, and to get even stronger after those crises. So 2020 and COVID is going to be nothing different versus what we've experienced as well in the past. And it's been true when we look at 2020, we started the year very strongly with an EPS growth of 13%, in line with what we've been delivering as well over the past few years. COVID hit in March, April around the world. And since then, we've been improving our performance quarter-over-quarter, And that's going to keep accelerating obviously in the quarters to come. But it's important to keep in mind that 80% of the company, which is what you've been describing, Rosemarie, in Life Science and in Healthcare, in Industrial businesses, what has been growing 3% in sales and 21% in operating income during 2020. Whereas 20% of our company, which is focused usually on the most stable market we serve, which are hotels and restaurants, will have been impacted the most by COVID-19. And it's been closing restaurants everywhere around the world kind of almost at the same time, which is why it's been impacting this business so significantly, combined with the fact that we have maintained all our team, we've maintained all investments and really making sure that this business gets even stronger post-COVID, that had an impact on performance, but it's going to have a positive impact on long-term performance, which is what we all about as a company anyway. I believe in that business Institutional, not just because it's a great industry to serve but it's a business that has been extremely profitable, that has been growing, as you can see, 5% in average over the past 20 years on that chart. As you can see even during 9/11 or during the financial crisis, it had some bumps, obviously, saw on the road. And 2020 being more impacted because it was everywhere around the world, everything at the same time, which is very unusual for such an industry. But I firmly believe that the performance is going to get back to where it used to be. And if I had to make an assumption is that the performance of that business will be even better post-COVID because the hygiene standards are going to be even higher after COVID. So if I think about now the future, starting with 2021, we're starting in a position of strength. We've been 2.5 months in the year now, strong underlying business momentum for 80% of our business. As mentioned before, new business is very strong. Innovation is strong as well. We have good pricing momentum, which is especially important with this raw material inflation that we're all experiencing. Obviously, we've invested a lot in our global capabilities, starting with digital, which has been true for the last 30 years. But last year, we've accelerated that because so much has been done remotely, so much predictive analytics, so much system assurance center, which is something which we use to monitor plants around the world remotely where we don't need to have people going in service well for the most time, which is very handy during times like COVID, which we'll continue to leverage going forward. We've added as well a lot of sales firepower, especially in Institutional where we really want to gain share before the reopening happens, as it's starting to happen right now, at least in the U.S. or in Asia. And we've invested behind Ecolab Science Certified that you've probably seen as well in the media, which is a program that we've developed during COVID, which is really providing a certification to hotel and restaurants that they can share with their guests in order to give them the reassurance that it's a place where they're going to be as safe as it can be. It's never 100% because we're talking about nature obviously here, but it's the best it can be. And it's been very successful so far. And last but not least, I'm really happy with the new growth engines that we are starting all the time. New ones like science was a few years ago, it's been extremely strong in 2020. Data centers, we started a year ago actually, which is kind of a new industry, an industry that's been booming during COVID because of Zoom and all the cloud usage. That was not part of our plans, but that's been helping quite a bit. Now animal health, which has nothing to do, obviously saw a direct hit with COVID, but it's an infection mastery that we have as well in here, really making sure that the animals in the farms that are getting towards the food industry afterwards as healthy as they can be, especially when you can't use antibiotics, which is right. Well, that's the natural replacement, which has been a great investment and a great growth story for us. All that is not going to change because of Texas that happened a few weeks ago. I wanted to be totally upfront as well with you, with our investors, with the Street as well this morning. Hence the release as well, really sharing what happened so for us. We've had a large share of our supply that has been shut down for a few weeks in Texas or the Gulf Coast area. Many of our customer locations, refineries have been closed as well so for quite a while. Our plants were closed as well. But all that is coming back up as we speak. Ultimately that has a short-term financial impact, especially in our Industrial business, primarily in the first quarter. But I think that during April, things are going to move on, and ultimately nothing is going to change on our trajectory for the company, which means that everything that I've been saying during the Q4 earnings that Q1 is going to be improving versus Q4, we're going to see strong growth as of the second quarter to deliver a year with an EPS that's going to be ahead of 2019. If you exclude this Texas impact, this is all true. Nothing has changed. So it's a bump in the road, and the road hasn't changed. It really start heading in a total right direction. Because of what you see here that we have good business momentum. Institutional is recovering as well for all the reasons I mentioned before. The macro trends are shifting in our favor. They're not all pleasant for everyone around the world. But for what we do, obviously it's driving demand of higher hygiene standards, more food safety, more infection prevention, and on the climate change obviously, so the water scarcity and carbon emissions, we help our customers produce more products with less water usage and less emission of carbon. Well, the demand is going to grow further going forward as well, which drives an opportunity that keeps growing especially with new businesses, as mentioned before. And the fact that we are investing so much as well in technology, especially in digital, where we've been a leader for the last 30 years in that field, and we accelerated as well. So during the past few months and quarters, which is really going to pay off in the years to come. And last but not least, we have a great ESG position. In start, when ESG started, it's something that we've started I would almost say 98 years ago when the company started under a different name, Economics Laboratory, which was promising to customers better results at lower total operating costs because you use less natural resources. Well, it became sustainability, and today it becomes ESG, which is one of the reasons why ESG is at the core of what we do, who we are and why we have such strong holdings as well as from investor in that field. Now I'd like to unpack a little bit more all of those elements, why I believe that the company is going to get even better. It's been good in the past, it's good today, and it's going to get even better tomorrow. It starts with what we're doing, obviously. Our purpose as a company is to protect people and what's vital to health. If you think about water in the next 10 years, by 2030 the world will need 56% more water than what nature can replenish. Well, that's not going to work, obviously because we can't create water that doesn't exist. But since we manage over 1 trillion gallons of water for our customers, we can help them ultimately produce the same outcome without using more water or driving the water usage, the net water usage closer to 0, which is the ambition of many of our customers. This is true as well in food safety, which is one of the second pillars, which has been strong for us for many, many years, helping our customers produce better food, safer food in a way that's sustainable as well. We touch over 1/3 of the global food supply, so we have a major impact as well for most of those customers. Public health, we've all experienced it unfortunately the hard way with COVID-19, where we help protect almost 1 billion hands every week as well around the world. Climate, we're all familiar with what's happening here. And the tendency of going 3 to 5 degrees higher over the next decade until 2100, unfortunately quite different, the 1 and 2 degree that we're all looking at. Well, we help manage 20% of the world's power that's being generated. We have a big influence in here. And last but not least, we have a role to play in society with all stakeholders, serving 3 million customer locations around the world in 170 countries. Well, we have a big role to play, and we play it and take it extremely seriously as well. Those trends are going to get even stronger going forward because we're going to have 1 billion more people by 2030, 2 billion more by 2050. Those people are going to consume more. This is all great news, except that it's going to add stress to natural resources. This is going to drive additional demand for what we do as such. Because ultimately as mentioned before, what we do for our customers in each of the 40 industries that we serve is really to help them produce more products, better products at the lower total operating cost because they use less natural resources. The good news is that we share across those industries, even though those are experts that are different industry by industry, the same technology platform, the same innovation platform, the same business model, a lot of equipment and digital technology as well, which is creating so much leverage across all the industries we serve. And ultimately as you know, we are a highly recurring type of business because 90% of our sales are consumables ultimately, which is driving such a predictable type of sales. Digital technology is also a new driver. So for us, because our ambition is to really connect 100% of our customers with 100% our teams 100% of the time because we provide more expertise at the lower cost because we can automate much more. And that's been a great journey for us as well, adding value for customers and our shareholders. Another perspective is also the market we serve. $135 billion, that's been growing so for many, many years. It's less than 10% the sales that we're doing today. And if we look at the next competitor, you look at that lower part of the chart in here, all the green are the competitors ultimately. So well ahead of our next competitor in most of the segments that we're serving as well. All the end markets that we serve, those bars are showing ultimately the size of the end market. The blue is who or what we cover today. Our share in the green is the opportunity showing, so how much more we can capture as well, the first one being foodservice, the restaurants [indiscernible] that I mentioned before, which is why I'm so bullish about the institution going forward. We serve the best brands as well out there. This is just snapshot obviously in here. Those are the most resilient companies as well. They're going to remain obviously post-crisis, and which is one of the reasons why we focus so much about them. Now the last few points is first, we create so much value for our customers, again helping them produce safe products, better products at a very low cost ultimately. It's an investment that's usually less than 5% of what they spend to produce their product, for a major impact on their product and how they manage natural resources. This is why there's so much interest in what we're doing as well. if I just share a few examples with you, just giving you the headlines on that, let's take restaurants or foodservice. We brought on the market last year this surface sanitizer, which is killing COVID virus in less than 15 seconds. This is a world record. This is good as such. But at the same time, restaurants can use it in 50% the time they used in the past to sanitize their surfaces, tables, floors and all that, which is less labor as such as well, with 99% less packaging because our products are so concentrated as well at the same time. This is creating labor savings. This is creating a better impact on the environment. In Food & Beverage, another example as well in here, one of the big issues are the biofilms that you have in pipes in food and beverage plants. Well, we have brought on the market last year the first EPA-registered sanitizer that's removing almost 100% of the pathogens within biofilms, while reducing the total cost of that plan as you can see, on an average cheese dairy plant, in here, productivity improvement of $3 million, milk that is lasting 3 more days and less water and energy that's being used, which is a positive thing, so from an environmental perspective as well. And we bring all that together for a global customer like ADM as such in here. When you bring it all together what we do for them, what we've helped them save, 2.3 billion gallons of water. On a side note, interestingly enough, this is what we, Ecolab, globally use in terms of water. Well, we saved it with one customer in one year and driving as well $28 million of operational performance improvement as well for investment that is just a fraction of that improvement ultimately. And as I mentioned so with data centers, this is a new innovation, new business as well. So for us, that has been booming. Many don't think that data centers are having such an impact on the environment. Well, they use the same amount of water of 2 million people, to put that in perspective. Well, we're working with the data centers provider to help them operate at close to 0 water usage as well. It's lowering the operating expenses. It's improving obviously the water efficiency. And it's making sure that they have better uptime that we can watch Netflix or be on Zoom a little bit more uninterrupted as well during that time. Last but not least, what it's creating this [indiscernible] profile that's very unique. So for us, where on one hand, we make absolute sure that our own operations are getting better every single year in terms of environmental impact and also our customers, which is even more important on our journey to become a water-neutral, carbon-neutral and all renewable-powered company as well by the year so 2030. Last but not least, the good news is that the more impact we create in terms of water savings, as you can see on the left, which is ultimately on our journey to have saved enough water for 1 billion people, well, it drives performance. Or the more we grow from a performance perspective, the bigger the impact as well. So it goes both ways as such. So a company that's doing good by doing well as well, and especially as well so for our shareholders, because if we think about the cash generation that this company is generating, well we've been providing dividend that's been increasing every year for 29 year after year as such. And we repurchased as well shares for an equivalent value of $5 billion over the last 10 years. This is $9 billion that went back, so to shareholders over the last 10 years, which is a good sign of how much cash this machine is generating. And just as a reminder, in the fourth quarter last year, we generated more cash than we did in 2019 as well in pretty difficult times, to say the least. So in summary, a great growth story, doing great things for our customers and for the communities as well at the same time, a market that keeps growing capabilities that are unmatched versus our competition as well in the industry. And really at the end of the day, a company that's doing well by doing good. Really proud of what our team has been delivering, and I think that the future is going to hold even better results going forward. So with that, Rosemarie, we'll open up for questions.

Okay, so you only have mine. I am looking at Zoom, there are no questions on the chat box. So first of all, congratulations again on your new position. And I am sure you are going to do a terrific job. So looking at the new areas that Ecolab is focusing on, which is data centers, Life Sciences and animal health. So in terms of the -- if you could give us a little more on each of those 3 areas and the potential as well as the more advanced, let's say, is the health and science area. What is the size of that particular business? And do you see the other 2 categories eventually getting to that particular size and how long will it take for them to get there? All of that in 4 minutes.

Well, yes. Those are great topics, for sure. And I thank you for the nice words before, Rosemarie, as well. And those new businesses are kind of the beauty of this company as well that it can reinvent itself so continuously opening up new opportunities. Life Science was a business that was kind of a sideshow of our Food & Beverage customers that were focused on pharma and cosmetics for many, many years. And suddenly, we realized that they had quite different needs, a different level of standards obviously so to produce medicines, vaccines like COVID-19 as well. And it was a business that was less than $100 million a few years ago. It's several hundred million today. We don't go too much in details in terms of disclosure. It's been growing, as you see in last years, at an exponential rate, extremely profitable as well because those are customers that are ultimately asking high quality, and they don't care too much about the investment, which is small compared to the risk that they could run. We all get our shots of COVID-19 vaccine. We hope that, that's been produced the right way and that we don't get anything else. And it's serving a market that is several billion large actually. It's a $6 billion market today, estimated. That's growing pretty fast, by the way, as well. And our digital technology, hygiene technology that we've developed in other industries where it is being brought to that. And that's why we have such a successful story in Life Science. If I take data centers, the other one, which is very different obviously, used to be part of our light water business for a long time, which was kind of considering cooling water, to cool the water for computers, which was kind of like in a hotel or in a manufacturing plant. And we realized that it was very different, Microsoft, Google, Facebook, Yahoo, and so on there, what matters most for them is the uptime, really making sure that they have 0 interruption. And when a computer so gets overheated, well, it stops and the uptime, so it goes to 0 as such as well. And we've been working with them in a great way of saying, well, we will help you get close to 100%, and at the same time help you from an ESG perspective. Those tech companies, most of the environmental impact is coming from data centers. So there is a very natural alignment between what we do and what they need, and that's why this is so well positioned from an ESG perspective as well. And that's a business that we've created a division behind it a year ago. It's a market that keeps growing. It's less than $1 billion today from a market size perspective, but I'm sure that it's going to grow very fast. You've seen the growth of cloud computing in 2020. Well, the market is growing at the same speed obviously as such. And last, the animal health is something that we've always been intrigued. We've been very strong in milk and in dairy plants and in cows as such, but not in chicken and swine porks, which have been protected for a long time with antibiotics. This is something consumers don't want to see anymore. Well, the only way to make sure that those animals do not get sick is to live in a healthy and infection-free environment, which is what we do. We acquired a company in Belgium last year, so CID Lines, which has been an extremely successful company, integrated within our dairy business, created animal health, and the rest is a very successful story.

That is great. Can you give us a feel for the size of the data centers and animal health currently? And what type of growth rate do you see going forward?

In both cases, it's a double digit, strong double digits of growth. Data centers is -- let me put it that way, less than $100 million, and animal health is a few hundred million.

Okay. Thank you very much. And with this, we have arrived unfortunately, at the end of our session. And I am assuming that having worked with Doug over many years, you more or less agreed with him, and the strategy remains the same until you decide you want to make your mark.

I've been part of the past and I've been part of this strategic development together with him. He's been an exceptional mentor for me. He's been a great leader for this company. So I own the past, I own the future. There is no short term to be expected. And we will capture new opportunities as they come, but that's good change. It's not a strategic change, so no real change that's expected now.

Well, thank you very much. As always, [Foreign Language]

[Foreign Language] Thank you. All the best. Bye-bye.

Thank you. Bye.

Thank you. Bye-bye.