Ecolab Inc. (ECL) Earnings Call Transcript & Summary

All right. Good morning, everybody. Thank you for joining us here at our Virtual America Select. Unfortunately, we're not in person in London, even though I think we all thought we would be, but hopefully, next year. But either way, we're really happy to have with us, again, representing Ecolab, Christophe Beck. Many of you have seen Christophe over the years at this conference, but this will be his first appearance as CEO. So congratulations on the recent title, Christophe, and thank you for being here. Christophe is going to run through a presentation and talk us through the Ecolab business. And after that, we might have some time for a few follow-up questions. But that's kind of the agenda and the plan for today. So with that, Christophe, again, thank you for being here, and I'll transfer it over to you.

Thank you so much, Manav, and good morning, everyone. Always an honor to be together with you at this conference and pleasure, obviously, so to share with you the Ecolab success story over the years. So before I get there, as always, so I'll remind you of the cautionary statement because we're going to be talking about the future, obviously. And you're familiar with that, so I won't go too much in detail naturally. Now stepping back a little bit, in a world that's changed quite a bit over the past few months and over the past few years, where infection prevention has become front and center of everyone's lives, probably even more than what we would be wishing, in a world as well where consumers want to know more about the products that they eat or consume, where it's coming from, what's the quality, is it safe? has it been produced right way? And in a world where the supply and demand gap from the water in the next 10 years is going to increase to 56% of the current consumption, well, Ecolab is very uniquely placed to help our customers -- our 3 million customers around the world help address some of the biggest challenges that they're facing as industries and as suppliers as well, so for businesses or for consumers as well around the world. Interestingly enough, by addressing and helping address all those challenges as a company for many years, that has helped us as well, drive the growth of the company, drive the earnings as well of the company. And that's why we've been in a position to drive our earnings growth double digits almost every single year in good times, in less good times as well at the same time. And nothing should change as well, so for the future because, as I will be, sharing with you as well, the trends that have been just expressing a few minutes ago, well, are here to stay and are going to intensify as well in the years to come. So before we get to the future of our company and how we look at the performance that we can deliver as well going forward, I wanted just to take a pause. And to look at 2020 which was a year like no other for everyone that was true for us as well as a company, just to step back and then looking a little bit more forward. Interestingly enough, if we look at the whole company, Ecolab, well, 80% of our business has been doing quite well, growing 3%, our earnings growing double-digit in a very difficult year, to say the least. And almost 100% of the COVID impact has been touching our Institutional division, which is the business that's serving hotels and restaurants, which have been closed for many, many months around the world as well, not always at the same time, but impacting our global business in a pretty significant way. So 80% doing really well, 20% in a very unusual situation. And ultimately, that's the beauty of our portfolio, 100% the whole company ultimately having a slight decline both in sales and in earnings because during 2020, we really managed our operations with the future in mind. It was not about managing the optics. It was not about delivering the short term. It was really making sure that we could serve our customers in an exceptional way in a very special year, and at the same time, protecting our teams, our investments to be in a great place when the economies are reopening, especially in the markets like hotels and restaurants, and for the long term, to be in a great competitive position as well. Thinking about the hotel and restaurants business, which is our Institutional business, and especially in United States, where the impact has been pretty deep, to say the least, as we all know. Well, that has been very unusual in our history. As you can see on that chart, which represents the growth rate of that business year-over-year, in some crisis as well, can be 9/11, as you can see as well in here, we've been growing 3%. You can think about the financial crisis, where it was minus 3% in a very extreme moment, or last year, 2020, with COVID-19, which was very unusual with a minus 27%, which is ultimately, well, a big decline, but a decline that has been kind of muted compared to what happened on the market. But most importantly, it's to look at the market -- at an end market, the performance we can deliver, so by serving those customers, which has been pretty steady with kind of single -- mid-single-digit type of growth and sometimes even better, as you can see as well on that chart. Which is why we believe that it's an industry that is a good industry. So for us, we've been able to grow in an industry which is not a high-growth industry, but we provide always more services to an industry that needs us, that drives sales growth, that drives earnings. That was a bit different in 2020, but we really think that, that's going to come back in 2021, and it is, and in the years to come, which is a good news. And as you could see, for the ones who are following us a little bit more closely, well, our sales and our EPS, which has been fairly consistent in the years 2018, '19 and even before that, so close to mid-single-digit in terms of sales growth, double-digit in terms of EPS. We started that way in the first quarter in 2020. And then things changed, obviously, in the second quarter of 2020 when COVID hit. But since then, we've been recovering very nicely in Q3 and Q4 and as well in Q1 of this year, where our objective is really so to get ahead of 2019 as quickly as we can. And the trajectory is clearly going that way. Our objective was really so to start the year 2021 in a position of strength, in a way where we could help our customers in 2020 when they truly needed us in a very extreme moment. And that the way we were serving them, ultimately, well, motivated them to do even more with us, to ask even for more from us as well. And it's exactly what happened. We've built even stronger relationship with our customers, and we can see that our net new business generation in 2020 has been at a record high, even higher than what it was the year before. It's continuing as well in 2021. So a very good story. Second, when we look at the underlying business trends of all of our businesses, especially in Institutional. We see that inflection point, which is a good thing, which is driven by North America and China that are in a very good place, as we all know. Europe and emerging markets like India and Brazil, obviously, in a different place, but that will change as well over time. And we're getting ready with the same playbook as what we've done in North America or in the U.S. and in China in order to be ready to serve them and keeping growing as well for the future. But at the end of the day, it was all about growing our share, getting more customers, more units, making sure they would be buying more solutions as well going forward because they need what we do even more than what they needed before because infection is becoming something which is more critical, sustainability profile that most customers want to deliver, well, has strengthened as well in their minds in order to get closer to their ambition. And we're here as well, so to help them. And one of the elements which is important is pricing as well, where we have raw materials inflation that's happening. The wages are going up as well. Well, we are part of everyone else's situation as well out there. This is something that we know how to manage quite well. We've been through that in the past few years as well. And this is why the pricing momentum is so important as well for us that year in and year out, we always go up with pricing, not because we just increased our prices, but because we increase the value we create for our customers. And we take a share of that, which is the price ultimately that our customers are paying to us. So we expect very good growth for the second quarter of 2021. It's comparing against, obviously, a pretty modest year in 2020, but this is not the case for businesses like in Health Care, in Life Science and Industrial businesses, which have been in a much better position ultimately. So looking at Q2, strong growth in the second half, which is going to be very nicely growing and ultimately, ending ultimate place towards the end of the year, early 2022, where we are in a place which is ultimately ahead of 2019. And what we've said is ultimately that we want to have, from an earnings per share perspective, that the full year 2021, adjusted for the Texas freeze, which was a very special onetime event that has impacted us quite much in the first quarter, well, we will be ahead Of 2019, really that we can turn the page on 2019 and grow further and be in a great position, again, in 2022 to continue our growth as well. And ultimately, our competitive advantage has strengthened in the meantime. It's been indicated by the new business generation, as I mentioned before as well, but we've accelerated as well our developments in digital technology. That's helped us during the pandemic, it's going to help us even more going forward. We've invested even more in sales firepower, which means the people we have on the field, selling new customers, selling new solutions to existing customers as well, this is driving market share. This is driving growth. This is driving earnings ultimately as well. And we keep fueling as well the new engines that we have, like animal health, like life science, like health care, like data centers, as I'm going to share as well a little bit with you. So really in a good position, so to look at 2021, and especially so, 2022, which is going to be up post-COVID, as we could call it. And that's why we feel reasonably good for the outlook of the long term. Looking at 2022 and beyond, our commitment is to have high single digit top line organic growth. On top of that, so we have M&A, which we usually do on every year basis and a double-digit type of growth in terms of EPS. So as you can see, so nice story until 2019. 2020 was a little bit lower because of what I just expressed, the continued investment that we made for the future, and that's why we feel reasonably good that in 2022 and in the future, we will get back to our traditional path of mid-single, high single top line and double-digit in terms of earnings. So that was for 2020, a year like no other. I'd like to spend some time now to share with you how we grow, how we look at our markets and how we look at the future as well as a company. And it's starting with the macro trends that are out there, which are for the most part in our favor. Population growth, we will have 1 billion more people by 2030. We will have 2 billion more people by 2050. Well, this is a great news for the most part, for the planet. This is good for most of our customers as well because the more they consume, ultimately, well, the more they need our solutions as well. The more they impact on nature could be greater if they do not pay attention, and that's where we can help them ultimately. So do better, produce more products -- better products with a lower impact as well on the environment. Population growth is driving our growth long term, which is a good thing. The fact that we have aging population in most places around the world, what is a good news for most people, obviously, that we can live longer. But this means as well that you have higher needs in health care, higher needs in long-term care, nursing home, which we serve as well quite extensively, and in pharma, which is driving our life science business. Technology is evolving very quick. And COVID-19 has boosted, obviously, the usage of digital technology. We are at the forefront of digital technology with one of the largest IoT network and cloud, ECOLAB3D, in the world that no one else really has. This is something that we can offer our customers that want always more remote service, remote monitoring, remote training. Those are services we can provide always more for customers that wanted even more than before COVID as well. And last but not least, climate change. This is true for water. As mentioned before, the need for water is going to surpass what nature can provide, while customers will need our solutions in order to produce more product while reusing water at the same time. This is what we do. While we do that, we use as well energy, which means you reduce as well your CO2 footprint, which is a good thing. So climate change is something that we can help our customers solve as well, and that's how we grow. Interestingly enough, we serve roughly 40 end markets, being hospitals, being restaurants, being hotels, being long-term care, paper mills, steel mills, data centers, you name it. And all those end markets have dedicated experts behind them. So we have people from that industry or trained in that industry that ultimately can serve the specific needs of those customers anywhere around the world. But the way we work as a company, we share the same platforms, the same technology, the same business and operating model, the same supply chain, the same R&D. And this is the strength of our model that we, at the same time, can have high specialization for our end markets and using the same platforms, which is leveraging and driving great earnings as well with products that are 90% recurring. Those are consumables that our customers are buying on a day-in and day-out basis with very little one-offs, as we would call that. The value propositions of our customers as, I guess, you've understood, so by now as well, is to help our customers deliver better products, better results at a lower total operating cost, which is interesting for them and for us because it may be at a higher price, but they get a higher return. This is good for them. This is good for us. This is good for nature. And we -- how do we deliver that? It's by bringing together breakthrough technology, on-site expertise, 25,000 people serving 3 million customers in 172 countries; it's leveraging the know-how that we have from anywhere around the world for any location anywhere around the world as well across industries as well at the same time; and providing data for that company, for that site, across industries as well, helping them understand what are best practices, what can we do for them ultimately to reach those levels of high-performance that they'd like. Interestingly enough, we are in a very big market, which is growing, by the way, so $135 billion addressable market. We have 9% of that market. We're the global leader, quite far away from all the competition that we have, not as one company. It's usually by end market as well, which is a good thing. Very fragmented, much more than what we are. And ultimately so $135 billion that we have for us ultimately so to grow further our business. This is true as well, by end markets, by industry that we serve, as you can see on that chart, well, food service, restaurants are being the largest one with almost $25 billion out there. Well, the blue part is our share. And you can look at that for food and beverage, hospitals, heavy industry, paper and so on. We are a little part, even if we're the #1 in most of those industries as well, we still have a lot of room to grow, which is a good sign. We're also serving 80% plus of the biggest, most famous brands around the world as well, without having customers that are creating a risk for us because the largest customer is less than 2% of our sales. And the top 10 are less than 10% of our sales as well. But we are famous for keeping our customers forever. We have this concept of customers for life, which ultimately drive retention. So very little attrition as well, which is a good sign as well so for us going forward. The way we run our operations is also important to us. We don't talk much about that, but it's really being an example as well in terms of how we impact the environment and how we think about it as well. So going forward, with our commitment to reduce our water and CO2 consumption or emissions of CO2 by half by 2030 and by 100% by 2050. Those are the commitments that we've made, and we're very well on that journey as we're progressing year-in and year-out, which is one of the reasons why we get the awards, not ultimately. So underlining just progress that we're making. So we feel good about that. The most important is that we can progress as a company. But most importantly is what we can do for our customers. And when you think about it, we serve almost 1/3 of the packaged goods industry, world food processed industry. It's a 42% of the milk that's being consumed. It's over 20% of the power that's being generated as well. Well, we have a huge reach in most of the industries around the world, and we help them create significant impact. Just to think about the few in terms of water, we've helped our customers in 2020 to help save over 200 billion gallons of water. Well, that's the drinking equivalent of over 700 million people worldwide as well. We've cleaned over 60 billion hands as well in 2020, which was a pretty special year, where hands had to be cleaned and sanitized as well on our path to getting closer to 100 billion as well in the next few years and so on. So the reach is big, the impact is big. And by helping our customers produce more products, better products, we help them at the same time, reduce the impact on the environment. And that's how we grow as a company, which is ultimately our model. But interestingly enough, this doesn't come at a high cost for our customers. If you look at that chart, the pie chart, ultimately, where the total cost of our customers is usually, and it depends on the industry, obviously, composed of mostly labor. It can be asset protection. It can be the water and energy that they use, the maintenance that's being used. Well, the share of their total cost that they invest in our services is usually less than 5%. But on the other hand, we impact the 95% that we are not part of the cost, but that we can impact, which is why the return for our customers is so high. And that's why customers are usually open to pay more as well so for what we're doing. If I give you a few examples just to illustrate a little bit to how we work with our customers. Let's think about restaurants. They have been obviously in a place where they had to do a few things at the same time. And this is true right now, was to disinfect. We've developed over the last few years, well, the only products or range of products that's killing the COVID-19 virus in less than 15 seconds. This is a world record. This is one good thing. But at the same time, restaurants want to be able so to turn the table as quickly as they can. Well, you can disinfect with these products without having to rinse after you've used as well those products. Interestingly enough, when you can do that, well, you kill the viruses, you can turn your tables much quicker, which means that you need much less labor. And since you don't have to rinse, you use much less water at the same time. And since it's concentrated product, you use much as packaging as well. So as you can see on the table on the bottom of that chart, ultimately, when you reduce costs, you have more customers coming in. And you reduced your impact on the environment at the same time. Good return for the customer, good return for us, good return for the environment, which is great. Let's take a food and beverage plant as well or cheese plant in that case. Biofilms in pipes is something pretty critical because it grows. It creates an infection risk as well for product. This is a safety risk, but this is a quality risk as well so for our customers. You take that example where we have a program that's helping eliminate biofilms extremely rapidly, extremely effectively while you use much less water. Well, you can see that example, it helps improve productivity by [ 3 million ]. It improves, in that case, the milk quality. You have less infection risk. The milk can be drunk much longer, 3 days, in that case. And you use less water and energy. This is a good deal for consumers, for our customers, for nature and for us as well. This is another example. You can take ADM as well, a close partner of us as well, with whom we've been working for years because they really wanted to find ways to produce more with much less water. We've helped them save over 2 billion gallons of water on an annual basis. Just to put that in perspective, this is our annual consumption as a company that we saved with just one customer. And while we did that, we helped them save $28 million as well for a fraction of that improvement as an investment in what we do, big return for them and for us, ultimately. And last example, data centers which have been driven not only through COVID. Before that, we've been using always more cloud technology, always more remote technology. It's been booming in 2020 for all the reasons, and that's why we're all remote as well today. By the way, while it's been increasing the demand for data centers, that means much more energy that's being used by the computers. More energy means more heat. It needs to be cooled. This means much more water, which is against what those companies want to do. Microsoft, for instance, has made the commitment that by 2030, they would be water-neutral. We're helping get there. And that's why we've created a business which is dedicated to data centers, helping those companies having better uptime while reducing water and energy usage and very nicely. So underway on that, as you can see, some pretty impressive numbers for one data center around the world as well. And this is a business that's growing extremely fast right now. So if you put all that together, thinking about the trends, thinking about the value proposition we have for our customers, how we serve them and what are the innovations that we are bringing to them in difficult years like in 2020 or in any year as well when they think about the sustainability journey as well. Well, this is the way we're growing. The bigger the impact we do for our customers, the more we grow. The more the technology they need, the higher our margins, which is driving as well our EPS. And that's why we feel very confident that our sales growth ambition of 6% to 8% and our EPS growth of double-digit is here to stay because, ultimately, we are in a good market, in a great position to serve our customers with needs that are increasing. We have a great model that's generating a lot of cash and return by design as well. We have returned over $9 billion of cash to our shareholders in the last 10 years, 2010 to 2020. Well, this is $5 billion in share repurchase, but this is also $4 billion in dividends that we've been increasing every single year for the last 29 years, and that was true last year as well. So in summary, we like a lot where we are and where we're going. We're the global leader with a fairly small share of this $135 billion growing market, which is good. So we have $123 billion or more that remains to be sold. And that market keeps growing as well. We help our customers really save fundamental needs, major challenges like water, energy, infection prevention as well. We have a strategy that's working, that's been driving top line growth because the bigger the impact, the more we grow. Well, this is something that's going to continue as well for the future. We are opening new end markets. Data centers, I shared that as well with you. This is good. We're working as well in our margins in order to improve them continuously by driving productivity, using even more technology as well going forward. And we are in a very fortunate place as well to be the market leader in most of the industries we serve, in most of the geographies that we're in as well. And we have a great team that's delivering ultimately great performance for our customers and great financial performance for our shareholders. So that's why we feel we are in a very good place today on our way for a good year in 2021 and an even better future as well in the years to come. So this is the Ecolab story, and I look forward to discussing even more with you, Manav.

Thank you, Christophe. That was really good. As always -- it's always impressive to hear the Ecolab story. Maybe just a few follow-up questions in the 10 minutes or so we have left. Just first, in the short term, you talked about the different verticals, the 80% of your business and the 20% of your business that have been impacted by COVID. In terms of the recovery, can you just talk about the regional differences, U.S., Europe, emerging markets? What kind of pacing you're seeing there?

Yes, great question. It's very differentiated by regions, as we all know. When we look at China, that's the prime mover. It's been out of COVID much earlier than anyone else. And our business has been doing quite well the second half of last year and has started '21 extremely well. And it's going to accelerate as well in 2021 and in the years to come. The U.S., in a better place than we thought, which is good as well since it's our largest market. Then you have Europe that's kind of stuck for longer than what we also than what the Europeans were thinking as well. To begin with, it's in lockdown in most places, in the largest countries as well in Europe. We hope that it's going to reopen in the next few months. They're all trying to be ready for the summer season. It's not an obvious move, so for most of them, but we are hopeful that, that's going to improve in the few months to come. And then we had the emerging markets like India and Brazil in a very difficult place. And I'm afraid that's going to take a few quarters until it gets back to a place like in North America. So very differentiated evolution in the different places around the world. I think it's going to take until the beginning of next year until the whole world is kind of back to where it used to be.

Got it. That makes sense. The other short-term question we get a lot is the increasing raw material costs. And we've obviously seen this before with Ecolab. And you guys are very successfully priced, albeit at a lag to make up for those. But just for the purpose of this audience, can you just remind us in terms of the magnitude you're seeing today, is it abnormal to what you've seen before? And if you're still confident on your pricing power?

So I would not call it abnormal. But we were expecting a year 2021 with benign headwind in terms of raw materials. We knew it would be more than what we've experienced in 2020. Well, it's turning out that it's quite much more than what we had planned for 2021, and that's simply following all the indices that we are all following. So nothing special that we look at internally in our company. We've gone through that as well in the past, as you mentioned, Manav. So we work on pricing continuously with or without raw materials increases because the way we discuss with our customers is about the value that we create to them, as I shared. So just a little bit before, it's trying to help them save even more costs. Well, when we do that with them, it's getting some share of that improvement as well on our side. And that's why pricing is always going up in our case. But what's important is usually the way we do that because, many of our customers work for decades together with us almost in every country around the world. We don't do big spikes. The way we approach that is usually over a year or 2, with our ambition that in the first year, we can recoup the dollars. And in the second year, we're going to recoup the margin, which is direction, obviously, as such.

Okay. That's super helpful. And just besides the raws is wage inflation and any other kinds of inflation, something to call out? Clearly, everyone in the market today is concerned about inflation broadly.

Absolutely. So we've offered merit as well so for everyone in our company. This is something we didn't do in 2020 because we wanted to protect the whole team as well. So just providing merit to everyone has increased obviously the cost of our overall organization. And we invest in people because it's our people that are providing most of the value that we create for our customers. That being said, digital technology is helping us, at the same time, drive productivity as well so we can get a better outcome at the lower cost because of the investment that we've made over the past 10 years, ultimately. But they were accelerated in 2020. So I think that's going to help us in 2021, but it's definitely a higher headwind than what we had expected earlier on.

Got it. And this digital strategy, you've been talking about it for a couple of years. And I think initially, it was about collecting the data and figuring it out. But would you say we are at a point where it clearly sounds like it's a value-add for your clients by providing that data. But can you directly start monetizing the digital data and services that you have now?

We do. So our -- what we call digital-enabled sales is roughly $1.5 billion. It's growing double digit right now, which is good. And you have a few components in it. You have the direct digital services like, for instance, our System Assurance Center from India, that remote monitoring thousands of plants around the world. Our customers pay a subscription for that. Well, this is direct digital sales as such. We have 3D TRASAR. This connected chemistry systems where we can ultimately manage systems by knowing how a chemistry is working. So in our customers' operation, this is being sold with the chemistry that we are selling. This is digitally-enabled sales. That's the second part. And the third one is improving our productivity, as mentioned as well before. This is helping our cost structure. So at the same time, with all the investments that we're making in digital for the many, many years passed, ultimately, it's driving value for customers. It's improving the margin of the products that we sell-in. And at the same time, it's driving productivity, which drives a better outcome as well in terms of earnings.

Okay. That makes a lot of sense. You had a slide on the data center opportunity, and it seems like a very attractive opportunity. In the past, you've talked about life sciences and pharma. And I was just curious, how many -- how should we think about how many more of these kind of subverticals or subareas of opportunity that we should find? Because it doesn't sound like there's one big kind of market that you don't serve. So is it just more of these subverticals that you find through business?

It is. This is the way we've been growing as a company. So almost 100 years ago, we were serving only hotels. Well, so from hotels came hotels and restaurants. From restaurants came food service restaurants and quick-serve restaurants. From quick-serve restaurants, we were serving as well, retail store. We created a separate business as well for that. We created a health care. We created pharma, which turned into life science as well. So it's sometimes serving totally new markets. Like data centers, they didn't exist 20 years ago. This is a totally new market. But for the most part, it's really segmenting always further, having experts serving that end market, providing expert services so for them. And the more experts we become, the higher the margins as well so for our customers because, well, we provide something that no one else can. But the interesting thing is that we use in the backbone, ultimately, the same platforms, the same technologies, the same R&D, which is this combination which is pretty cool in our system.

Got it. Okay. And then just last question for you. We've heard a lot of players in other industries as well who have a good competitive moat as you do talk about the competitors being more challenged because of the scale, and there's an opportunity there. I guess my question is more, is Ecolab still going to be focused on M&A? Or is this just more kind of an organic recovery story to look out for?

It will be both. It's always been both for us. We've done over 100 M&As in the last 10 years. It's not going to change going forward. The good news is that we've become really good at it. And we know that the track record of M&A usually is not very good. Well, in our case, it is because we have so much practice. Most of the M&A that we do is usually so-called bolt-ons. So those are smaller things that we can add to what we're doing. We have a playbook. We have teams. We know exactly how to do it. And when it's larger M&A, like when we acquired our water business, so Nalco in 2011, ultimately, well, we have the financial strength. We have the people power as well to do it. We know how to make it work. We've learned as well the things that are not working so well, so we'll do that better in the future. So when I think a little bit about what's going to come in the years to come, we're going to continue with bolt-on smaller acquisitions. We know how to do it. It's efficient. It's a high return, and we are in a position where we can go for larger acquisitions as well. Whenever time is right, whenever the opportunities come in, we will do that as well.

Got it. All right. That's super helpful, Christophe. I think I'll leave it there. Thank you again for your time. Hopefully, next year, we'll be in person in London. But it sounds like maybe in September at your Investor Day, we'll be able to see you in person as well.

Looking forward to that. Thank you so much, Manav, as always.

All right. Thank you, everybody.