Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Good morning, everyone. My name is Tim Mulrooney, and I'm the research analyst here at William Blair who covers Ecolab. For a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. Now as most of you probably know, Ecolab's the global leader in cleaning, sanitation and water solutions. With the spin-off of Champion X last year, they're now a more focused company with what many would say is a more stable earnings stream, at least it would be in a more normalized environments. Of course, the pandemic's had a major impact on the institutional business given the large customer base of restaurants and hotels, but I think a lot of progress was made in 2020 as well. And I look forward to digging into what those things are and how the company is progressing through this recovery period. We're excited to have with us today Ecolab's Chief Executive Officer, Christophe Beck. Christophe has a presentation for us this morning. And if there's time at the end, I'll ask a few questions. [Operator Instructions] Good morning, Christophe.

Good morning, Tim.

Thanks for joining us.

Great to be here. Always an honor to be with you, with investors and sharing our story, our growth story short term and long term as well. We know the world is an interesting place right now, and we've done well last year. We're looking forward to a strong year in '21 and even a better one going forward. So if that's okay with you. So Tim, I'll get started.

Yes, that sounds great. I understand you have a presentation for us this morning. We're all looking forward to it.

I do. Thank you so much, Tim. And before I get started, obviously, so I'm not going to read the whole cautionary statement, but be all familiar with it since I'm going to talk about the past, but I'm mostly going to talk about the future, '21 and beyond, which is even more interesting. Because especially in a world where people have become way more aware of public health issue, not just related to COVID, but as well all the ways that can get sick with what you touch, what you breath, who you meet, what you eat, what you drink, well, it's a pretty interesting place to be as the global leader in public health as such. At the same time, people have become way more sensitive as well, so, to sustainability concerns: how companies are impacting the environment, how companies are using natural resources as well and what kind of waste they're creating as well. And this is the second pillar of our company, which we've been working on since 1923. So it's not exactly new news for us. So when we think about public health, when we think about sustainability, being the global leader in both those fields will bode well for the future as such as a company. Which has driven our growth story so quite nicely over the past 10, 20, 30 years, as you know. And it's just going to continue as well in the future because what we're doing and the way we deliver our value to customers as well has become even more important than what it used to be pre-COVID, if I may say. And I would say, I'd like to spend just a few minutes on how we look back at 2020, and I hope it's going to be the last time I need to do it. We can talk about the second quarter and the future and put all that stuff behind us as quickly as we can. But still let me spend just a few minutes on that before we move for the future. 2020 has been an interesting year for us for sure because, as you can see on that chart, 80% of the company did well in a very special year, to say the least. Top line has been growing. Bottom line has been growing double digit and 20% of our company speak institutional. Hotel and restaurants have been impacted almost 100% by COVID-19 because it's been closing down hotel and restaurants. This is less the case now in the U.S., but it's still the case in places like in Europe and let alone in a few emerging markets being in a dramatic situation right now. But 80% of the company has done really well in 2020 and 20% has been impacted by COVID-19. And when we talk about the institutional business, and just for perspective, looking at the U.S. situation, I thought that, that chart is pretty telling, because it's an industry that's not known for big variations and especially not big bones or big bust, as such, except when COVID is happening. So when you look at that job, which is showing the top line growth of our U.S. institutional business over the past 20 years, you can see it's been a great story. As such, really strong growth, middle -- mid-single-digit type of growth and sometimes even going high single or double digit as well. And then you had 2020 where basically our customers shut down, and that was a very unique situation. But the good news is that they're reopening up as well, and I don't see major changes in that industry on the long run. The way they operate, the way guests are going to expect a hygiene standard, well -- but as such, in terms of consumption, I don't think that anything is going to change on the long term. Which is why when we think about 2020, while we've had a very steady recovery both in terms of top line and in bottom line as well. And if we exclude this Texas freeze as well that we've experienced so early in the year, which had nothing to do with COVID, by the way, but impacted our sources of supply in an unusual way, ultimately, so our earnings have been improving as well steadily quarter-over-quarter, and that's going to continue as well going forward. So last comment I'll make on the past in here is that we wanted to enter '21 in a position of strength. And we truly entered '21 in a position of strength, as you've seen as well, so with our first quarter results as well. If we look at the underlying business, I'm really happy with what's happening in the U.S. and in China. Especially in Europe and emerging markets, it's a bit delayed for all the reasons that we know. Europe is kind of opening now as we speak, depending on the countries that you're in as well. And we've used that time as well to grow our share with new business, as such, which has been very strong in 2020, has been ahead of 2019, which was ahead of our expectation. And while we did all that, we've accelerated pricing as well at the same time. So we expect strong growth in the second quarter, and for the future, a very nice recovery. Because I believe that our competitive advantage of has improved in the meantime as well because of what we do, as mentioned before, the fact that we have strong new business. We have good innovation as well. And we've accelerated, as well, our digital investments in order to increase, as well, our sales firepower in places where we need to get much more penetration, especially in the institutional business. Which is why I believe that EPS, as story that we've had over the past 10, 20 years, well, it's going to continue as well. And that our ambition of top line organic growth of 6% to 8% and double-digit EPS growth will remain anything, so has gotten strengthened during COVID-19. So that's it for the past, if I may say so for 2020 and the start of this year as well and hopefully really coming out strong as the recovery evolves in here. Now if we step back, so really thinking a little bit more long term. If I think about the macro trends, I mentioned, so those 2 public health and sustainability. Well, there is more to our story. The fact that there will be some 2 billion more people by 2050 is going to increase consumption. This is increasing our consumption of products as well because they need to be produced in a safe way and in a way that's respectful of the environment as well. This is good for us as well. The change in demographics, the growing middle class in most places around the world, fact that the population is aging as well, what is driving our life science and health care businesses as well, which is why I'm so bullish about those 2 businesses as well now and even more in the future. Technology expectation from our customers, what is increasing. During COVID, it's been accelerated because, well, everyone is expected to have everything on their phone or being managed remotely. This is things that we experienced in the past. It's even more true going forward because of the COVID acceleration. And as mentioned, so climate change is not going anywhere, and that's a trend that has just picked up steam in the past few quarters. When we think about how we capture, as well, those long-term growth trends, interestingly enough, as a company, we serve 40 different industries end markets, and we have dedicated experts. They're not the same if they serve a hospital or if they serve a power plant. Obviously, those are dedicated expertise that we have around the world with our 25,000 field people serving 3 million customers in 172 countries in 40 industries. This is where we have this segmentation that works so well for us. While at the same time, we leverage the same platforms. We leverage similar innovation. We leverage similar technology as well in terms of digital tools, for instance. We have the same business model as well everywhere we operate as well. And last but not least, 90% plus of our sales are based on recurring consumable revenue as well, which is really something that we nurture today and even more in the future. Talking about the way we serve our customers. Wherever they are, whatever the industry is, it's always the same. We bring great experts at the customer location. We support them with breakthrough technology. We provide know-how and training to their operators as well. And this is something that is increasingly important going forward. We provide them with data insights. It's basically understanding, well, how does you site, your restaurant or your power plant compare to the other sites with the new organization? How do you compare in the industry? How do you compare across industries as well? Since we deliver value to over 3 million customers around the world, we have unique knowledge about what good looks like and that we can provide customers with that perspective on how much opportunity there's out there that they could get as well. So a great model, really so differentiated by end market, leveraging the same technology and platforms and really so providing on-site service to customers anywhere around the world. We are serving $135 billion market. We have 9% of that market. We're the global leader, but we still have huge room to grow. And when we think, in terms of competition, that's a lower part of that chart, basically. Competitors are way behind us in terms of size and in terms of fragmentation, as well. There is no one that is the same as Ecolab out there. We have competitors by end segments. We don't have a competitor as a company as well as such. And if we look at all the end markets that we serve, well, we have a bunch of opportunity everywhere. If you look at that chart, the bars is the size of the total market. The blue is our share and the green is how much that we can grow into it, as you can see. So there is ample room for us to grow. That's why we're saying even if the global markets are not always our friends, that we sometimes go through economic recessions, well, we can focus on gaining share, which is what we've been doing for so long and will keep doing as well going forward. We have the chance that we're serving most of the major brands out there from [ hygiene ] to health care, to pharma, to industrial businesses, institutional or energy as well. But interestingly enough, even if we serve those large companies everywhere around the world, none of them is bigger than 2% of our sales and our top 10 are less than 10% of our sales Well, so there is not a systemic risk with one customer that could have a major impact on the company if something were to go wrong as such. But this is not the way we look at it. It's obviously looking at what could go right with all those customers, which are growth opportunities for us. We can penetrate with more solutions and serve them in more locations around the world. Which leaves us ultimately so that the impact that we create for them. When you think about the reach of our company, just a few facts, there's a lot on that chart, obviously. We serve over 1/3 of the world food production. This is part of the reach of our company. Over 20% of the power that's being generated. So what we do has a major impact on how industries in the world use natural resources. And when we look at how much we've had delivered in 2020, well, we've helped save over 200 billion gallons of water. To put that in perspective, well, that's enough drinking water for over 700 million people, which is quite remarkable. Same time, we had cleaned close to 70 billion hands during times that while the world needed what we could do more than ever as well as such. So big reach, big impact together with our customers. And I'd like to say that it's not just what we do for our customers, but that's also what we do within our own operations, where we want to truly make sure that we are an example for this out there, that we can become as well water-neutral, carbon-neutral as well going forward with safety practices that are best-in-class as well in all industries that we're serving. And we've been recognized as such by our customers, which is, for us, the most important, but many institutions as well out there year in and year out. Interestingly enough, for many years, many companies and customers were thinking that sustainability and safety came at the cost. Well, this is the same thing that is changing, where customers are realizing ultimately that what they invest in our value can help them impact the overall operations and get the return that is much higher. As you can see on that chart, which is kind of an average customer out there, what they invest with us is a fraction of the total cost of their own operation, which is usually driven by labor, asset and whatever raw materials that they're using as well at the same time. So a small investment for a very big impact, which is the beauty of our model as such in here. It's small investment for a great return. And I'd like to give you a few practical example in here to illustrate that in an easier way, for the ones who are not too close to all those industries, starting with this obvious industry of restaurants and hotels in 2020. So I thought that, that example could be quite telling as such. We have put on the market, the only program that could kill the COVID-19 virus in less than 15 seconds. So you don't have to wait. You just use it. It kills COVID-19 and it can move on. This is one element. But the second one, which is even more important, you don't need to rinse, which means that you need less labor. You can turn your tables much quicker as well. Which means that for a restaurant, well, it's not just safer, but at the same time, they can reduce by the 50% the time they need to clean and get the next customer as well. And on the sidelines, since our products are highly concentrated or solid in many cases, well, you have a reduction of 99% of the packaging as well at the same time. So it's good for them from an operational perspective. It's good from a public health perspective, and it's good as well so for the environment, which is a very good thing. When you talk about food and beverage, for instance, let's take dairy to take one example. So we all drink milk a little or a lot. Well, this is a natural product that is creating as well. so pathogen risk, which is creating [ biofilming ] pipes where pathogens are getting together ultimately and creating some bio-risk for the production of those products. We've launched a program in here that is not only so killing those biofilms, so very effectively as the first EPA-registered sanitizer, as well, so far by -- for biofilms. At the same time, it's increasing the operational performance of those dairy plants. And you can see that example in here for one of the large cheese and fluid dairy operator here in the U.S., well could improve productivity 3 million because the wash time has been reduced by 30%. Easier to clean, more effective and -- as well, so more productive as well from a cost perspective. At the same time, if you improve the safety of the production lines, it can have longer-lasting milk as well. So you have 3 days more of shelf life. And ultimately, if you do all that right, you have water and energy consumption that's going down as well at the same time. So again, like the last example. So the right thing for the product and for people while you improve your operational performance and reduce your impact on the environment. In another case as well, so with a big commodity manufacturer of grains out there. We've been working with them so for many, many years. We've helped them save over 2 billion gallons of water annually. This is our own corporate consumption in 1 year as well, just to put that in perspective and help them to save almost $30 million of costs annually. And last example, data centers, which have been booming during 2020 and the years prior, but that's been truly a turning point because of the whole cloud technology that we're all using. Well, they need a lot of energy. They need a lot of energy, which means they need a lot of water to cool down those computers as well. Well, that's where our service comes into play where we help them operate better, guarantee uptime while we reduce their cost of operating and the impact as well on the environment. So I hope those examples are giving you a little bit -- a more practical perspective on how we deliver this value to our customers. Ultimately, those are all the reasons, when I think about trends, how we serve our customers, the innovation that we provide, that ultimately our ambition of high sales growth and double-digit EPS growth, well, will continue in the years to come. We are a cash and return machine, and it's going to stay as well. We've been increasing our cash dividend for 29 years in sequence as well. And we've returned to shareholders almost $9 billion as you can see here over the last few years in dividends and in share repurchase as well at the same time. So in summary, we like a lot where we are. And I like even more where we're going because of the size of the market that we're serving. So $135 billion, we have less than 10% of that market. It's a growth market driven by secular trends of public health and sustainability. And we have a position that's unmatched with our 25,000 people serving 3 million customers out there. And we have the means of our ambition as well to invest behind those businesses, behind innovation and behind our talent as well, which is why we believe that high single top line and double-digit EPS is an ambition that holds still true for the many years to come. So with that, Tim, back to you.

Well, thank you, Christophe. That was a great overview. I appreciate you walking us through some of these opportunities. We've got a few minutes left before the session ends. Would you mind if I just asked you a few questions until 10:30 here?

Great. Yes, absolutely, Tim.

Excellent. Let me see. So one question that I've been giving more often and something that I'm going to be asking all my companies about at the conference this year's ESG. Obviously, this is something that's been going on now for many years, but I think it's coming into focus more acutely for many of our clients. But I don't want to ask you the same ESG question that I'm going to ask everybody else because you guys are already well known as an ESG company. I know you often rank on the top 10 list for a lot of ESG ranking systems. So I want to ask you a different question. Given Ecolab's strong position in ESG, can you talk about -- how does ESG help you grow your business? I'm thinking about what I've heard you say before, which is doing well while doing good. Can you talk about how that's built into your business?

Absolutely. Great question and topic that we are very passionate about. And it's really cool to see that not only the public in general, our children are interested in how companies are operating and managing natural resources. But our customers are responding to that many have to and some want to. Obviously, that's always the same. You have the ones that I had and the ones that are a little bit dragged along without going too much in detail, we'll talk about that. But when you think about it, so our core value as a company is helping customers produce more and better product while reducing their total cost by reducing the usage of natural resources and the waste that they're creating. This is what we've been doing for almost 100 years. And the name of the company even started as Economics Laboratory based on that promise. Just the names have changed in the meantime, sustainability has become fashionable. And now ESG, and now companies are realizing that not only consumers expect that, but investors expect that. And most importantly, using less natural resources improved your P&L.

Yes.