Ecolab Inc. (ECL) Earnings Call Transcript & Summary

All right. Great. Looks like we're all set here today. Good morning, everyone. Thank you for joining us with Baird's 51st Annual Industrial Conference. I'm Andy Wittmann, I'm the senior Analyst Covering for Facility Services here at Baird. I'm very delighted to be joined, again, this year, by Ecolab and Ecolab's CEO, Christophe Beck. We're going to have about half an hour here, and Christophe is going to take us through the company presentation. We might have a little bit of time for Q&A at the end, but remember, there is a breakout session at the end of this presentation. So you can all meet us there if you do have any questions. So with that, I'm going to turn it over to Christophe to walk us through the company's overview.

Thank you so much, Andy, and good morning, everyone. Let me try to share my presentation first. I guess that's the biggest challenge of the day. I should be able to do that, here. Yes, it's working well. Okay. Thanks, Andy. Again, great to be here together with you and to share the Ecolab growth story, which is one of those stories of doing well by doing good, which is pretty timely, obviously, with the COP26 happening in Glasgow as well today. But before I get more in details, I'll remind you, obviously, of the cautionary statement. We're going to talk about the present, but most importantly, about the future which is, as always, a bit uncertain even though we're quite optimistic when it comes to Ecolab. So jumping into our company, especially for the ones a bit less familiar with who we are and what we do. So when we think about it in a world where we're going to welcome 1 billion more people in the next 10 years or so, we are pretty fortunate to be the global leader in hygiene, in infection prevention, in water and in climate technology and expertise and services as well, helping customers produce better outcomes at a lower total operating cost because they use less natural resources, which is basically our value proposition as a company. And what's really interesting is that our reach, as an organization, is quite significant. We serve 3 million customer locations around the world. We touch roughly 1/3 of the human population and world food production. We touch 1/4 of the world power that's being generated as well. So what we do and what we touch, ultimately, is very broad, which is leading to very interesting outcomes as well, especially so from an ESG perspective, as you can see as well on that chart, just to cite a few in here. When we think about health protection, we've helped during the COVID times, clean and disinfect 66 billion hands. We've had last year, saved enough water for the needs of over 700 million people around the world. We've had feed close to 1.5 billion people in a safe way, and we've helped our customers reduce their carbon footprint in a very significant way. So an interesting model with a big reach leading as well so to significant outcome for our customers. And the interesting point is while we do that, the bigger our impact, the faster we grow. And that's been true pre-COVID. Obviously, as you can see here, our EPS has been growing double digits for years, like 23, 30 years. This is the steady state that we have as a company, and nothing is going to change as well in the future, if anything, it's going to improve. And even during the COVID times 2020 and partly 2021, obviously our EPS has been slightly moderated for 2 reasons. On one hand, we've been very happy with how 80% of our company has been operating, especially in Industrial businesses, in Healthcare and Life Sciences, where businesses have been growing. They've been growing in topline, they've been growing in bottom line as well, while 20% of our company that's serving the hospitality industry, restaurants and hotels went down significantly, obviously. But what's important is that we've decided back then, early in the pandemic, that we would maintain our team, nobody would go, we would protect the pay of our people because our people have most of the knowledge that we have as a company as well. And when we see today how hard it is, not only to keep people, but to hire new people, well, this is a much lesser problem so for us because we've kept the whole team during all that time, which is one of the main reasons why we believe that, in the future, we will keep growing the 6% to 8% topline, 15% plus type of EPS growth as we promised as well so for many, many years. And during that time, we have strengthened our key growth drivers. Digital has been a very important part, obviously, of the way that we deliver value to our customers during COVID, has been demonstrated in a great way. So we maintain our strategic investment. We maintain our team. We accelerated digital transformation. We launched more product innovation than average, especially around infection prevention and as well helping our customer progress on the ESG journey as well. Interestingly enough, our new business generation has been better than ever in 2020 because our customers were needing partners that could help them protect their guests if we think about the Institutional business or as well in Industrial as well, being able to produce better results at a lower cost. And we kept working as well on select M&A. Again, one of the reasons why we believe that our ambition of 6% to 8% topline organic and 15% EPS growth ultimately so is going to stay and if anything is going to get strengthened as well post-pandemic. So our model that we've perfected for 97 years now is a model that we like a lot. Because it's driven by the macro trends that I'm going to cover as well in a second with you as well. We delivered what we promise, year in and year out. That's true for our customers, that's true for our investors and that's true for our employees, obviously. We are expanding our margins continuously through innovation and digital automation. And since Ecolab is a very strong cash-generating machine as well, it drives very strong returns, which are all additional reasons why we believe that the long-term performance is going to remain strong. So why are we doing well? And why do we believe that we're going to keep growing as an organization is that ultimately, what we do are serving macro trends, are serving what our customers and what people needs around the world. Those are not short-term trends. Those are long-term trends. Starting with people health. During the pandemic, it's become very clear to all of us that, yes, we can get sick through infection. That can be true in public spaces, that can be in a hospital, that can be with what we eat and that can be, obviously, what's being used to produce what we eat as well us human being. That's a trend that's always been here. That's a trend that has accelerated because the awareness for most people has become more clear because we've experienced it as human beings and as families as well every single day. And that's why our program of Ecolab Science Certified, which is helping our customers ultimately prevent infections is more relevant than ever. And COVID has also elevated the hygiene standards. The standard question is obviously how much? We don't exactly know. It's going to be lower than during COVID, but it's going to be higher than what we've experienced in 2019 pre-COVID as well. We have a lot of digital services and digital tools that we provide to our customers, well, those have been embraced at the pace that's been much higher than what we experienced as well pre-COVID. Labor challenge shortages everywhere as we know it, while our solutions help drive better outcomes with a lower as well need of labor, which is obviously something that's positive for our customers. And last but not least, interestingly enough, the sustainability focus of our customers, which we thought would go a little bit on the backseat, did not happen, it's become even more important, if anything for our customer. So when we launched our Ecolab Science Certified program during the pandemic, earlier in 2020. We thought it would be just for COVID. Well, we've realized that, that's a program that we can keep for the years to come because it's ultimately bringing all the offering of the company, of Ecolab to our customers to demonstrate to that guest, especially in the hospitality industry that the place where they're welcoming them is as safe as it can be as well. It's generated huge interest by over 160 chains in the U.S., over 30,000 locations. It drove incremental business because it drove as well penetration of all our solutions and you can see as well on the right, customers like McDonald's have endorsed as well that program that's been rolled out in all the locations as well around the country. The second big trend beyond people health is the planet health. We're doing the COP26 week right now, well it's pretty timely. And interestingly enough, when most people talk about the CO2 emissions, the main driver for CO2 emission is how we manage water. 25% of the energy produced in the world is used to manage water. We have an issue in water, will be by 2030, having a gap between supply and demand of roughly 56%, which is a bit more than what we even thought a few years ago. So ultimately, managing water, helping our customers reduce their water footprint reduces as well their carbon footprint. And that's why we have customers like this one that won't be named, a global leading FMCG company that really wants to become carbon neutral, wants to become water neutral as well. Well, they can get both as well at the same time with our program, reducing the water footprint, reducing the carbon footprint. And most interestingly, they can do that in a way that's driving as well, high returns from a financial perspective as well. And last but not least, those customers want to protect their guests, their consumers. That's what we call people health, while protecting the planet health as well. They want to do it a way that's driving towards their own commitments as many customers and many companies out there committing for big bold ambitions for 2030 or 2050, we're here to help them get there. Bringing all that together, well, we give them a unique proposition of protecting people, protecting planet, while improving as well, so the performance of their own business because their P&L improves as well at the same time. We are in a unique position here because we're probably one of the only companies that can do that as well, and we have a small share of a great market as well out there, which is probably one of the reasons why so many brands out there are coming to us and trust us as well to help them run better and safer operations as well for the sake of the planet and of people. For the ones, a little bit less familiar with what we do, I'd like just to share a little bit what's our model and how we grow ultimately. We serve 40 different end markets out there from restaurants to [indiscernible] plants, to hospitals, to pharma plants and so on, ultimately. But interestingly enough, if we have dedicated expert organizations behind each of those end segments, we share the same model, we share the same technology, we share the same digital platforms as well, which are all driving ultimately 90% plus of consumable revenue. So it's not one-offs. It's really something that's happening on a daily basis. And we are sharing a lot of innovation as well across the company, being in terms of chemistry, being in terms of technology, being in terms of digital technology as well that we can truly share across all those end markets and industries that are, for us, a huge source of best practices that we can introduce to new industries as well as such. And we bring it all together to 3 million locations around the world where we have an expert coming to that location, bringing on-site service and technology, know-how from anywhere around the world and helping customers understand where they're heading and how they can improve as well in terms of how they run their operations and how they impact as well as nature out there. So we create a lot of value at a fraction of their total cost, as such, as you can see on that chart, if that's the total cost for kind of better customer out there. We're usually a few percentage points of their total cost that's driving a huge amount of value for their total cost as well at the same time. So interestingly enough, we're trying as well at the same time, to increase our total addressable market all the time. We've done that during 100 years as a company. We've made a major step as well 2 weeks ago when we acquired Purolite, which is really adding the new market, adding a new growth platform for our company that can help us grow even faster like we did when we acquired Water 10 years ago, like when we build Pest Elimination, when we got as well digital technology from Nalco, we can expand it everywhere around the world. But interestingly enough, it starts with acquiring a very strong company that's expected to have almost $0.5 billion of sales for next year at very high margins, as you can see, so north of 40% EBITDA as well, growing double digits. So as a stand-alone, a very strong add for us. Interestingly enough, this is not only interesting as a stand-alone, it creates a platform that's feeding Life Sciences, a new business for us that we've created 5 years ago that, that's grown tremendously well, that has very high margins as well and that's very promising as well as for tomorrow because they're serving the pharma market, which is a huge market, growing double digit and especially led by biopharma, which is where Purolite is most strong because they are the global leader in extraction and purification technologies, especially in the pharma world. Why does it make so much sense for our customers? It's because we created 1 plus 1 equals 3 situation or solution in here. We, Ecolab have been focused on making sure that all the processing lines and environments were safe, sanitized and sterile to produce pharmaceutical products and Purolite is making sure that the product itself is as pure as it can be. Combination of goals ensure the best products at the lower cost with the least impact on the environment, which is the Ecolab value proposition. And at the end, we help as well add a new capability for our Industrial markets like power generation in nuclear power, like in mining, extracting lithium for EV batteries as well. So giving us a whole new engine of growth for the company for the future. Which all brings me to this very cool place that as a company, over 97 years, we've managed to become the sustainability partner for our customers. First and foremost, because we run our operations in a very sustainable way, with our goal 0 objectives as well as a company. But most importantly, for what we do for our customers out there, helping them become more sustainable, helping them reach their net 0 ambition as well, and that's why so many customers are coming to us asking for those net 0 programs, which are aligned with their commitments that they've made as well out there. Interestingly enough, we do all that in spirit than with a model that the bigger our impact, the more we grow, which has always been true, and it's even more true today, which is one of the reasons, again, why we believe that our financial objectives of 6% to 8% organic sales growth and EPS growth of 15% is the real ambition that we need to keep as well. We have a very strong cash-generating model as well, which we keep affecting as well. So year in and year out, we have a very low leverage as well in terms of net to adjusted EBITDA. This is even true after the Purolite acquisition, so bringing us a little bit higher towards 3, but we will get back as well to 2 in the years to come as well and making sure that our capital allocation and our cash flow priorities remain steady with what we've done so far, really making sure that our dividend keeps growing every single year that we have as well, the funds to grow as well our business inorganically with acquisition and last but least as well with share repurchases, which are things that we've been doing for many, many years. And if we look at the last 10, 12 years, we've returned to shareholders almost $10 billion of cash. On one hand, through dividend, as mentioned, that has been increasing. So for 29 consecutive years and as well so the share repurchase bringing the whole return to close to $10 billion, as you can see as well, in a very consistent, strong and improving year in and year out way. And that's all the reasons why we have a feeling that even after 97 years history, as a company, we're still at the beginning of our growth story. We are a global leader with a small share ultimately of $152 billion gross market. We're serving really fundamental, global and increasingly demanding needs like people health, planet health, while making sure that we help our customers do that in a way that's sustainable financially as well at the same time. We have a powerful and proven strategy. As you've seen over the years and during this presentation, that's driving topline by doing what's right for our customers and their own customers as well. We're adding new opportunities as well. So for growth, we add new markets, we add new end markets as mentioned as well before, with Purolite and Life Science, opening new growth opportunities for us. We have plenty of margin improvement opportunities, especially driven by innovation, digital technology as well. And we're in a place where no one else can truly offer what we can, like Ecolab Science Certified to protect our customer's customers from infection with our net 0 program to help our customers in all industries ultimately, so reach their net 0 ambition and last but not least, to do that in a way that's driving strong and consistent financial performance in good times like in less good times as well. So we feel great where we are, even more where we're going. And with that, Andy, I'll pass it back to you.

Great, Christophe. I appreciate the overview. We have a little bit of time here, and that's good because I think there are a couple of questions that are worth diving into here. And I think here we are at the industrial conference of Baird. We're just kicking off the first day of 3 busy days and there's going to be a lot of talk over the next couple of days about supply chain and cost inflation that's broadly hitting the macro. Christophe, could you talk specifically about how your supply chain has been holding up and your ability to deliver for your customers as well as the price cost dynamics that are going on in your business today?

Great questions. It's tough out there, no doubt. We are really proud in terms of how we've been delivering for our 3 million customer locations out there, but it's not happened in a traditional way. There are shortages everywhere in terms of raw materials, packaging, truck drivers, logistics and all that. And the chance we have, Andy, is that we have a great supply chain team coming from leading industries like Amazon as well, who have joined us over the last few years and have helped us really solve -- reformulate products, find new ways to distribute our products to customers in separate ways when our distributors could not do it as well. So ultimately, for our customers, it's been a good experience. For us, it's been a real work, but we've demonstrated we can do it as well. To your question on inflation, it's obviously something that we are experiencing like everyone else around the world. The interesting thing with our model, as you know, is that inflation, long term, for us, is a good thing because it's helping us drive pricing at even higher level. And we always do it in a way that's driven by value we create for our customers and not only raw materials as well. So short term, there might be a crunch because the input cost is higher than what it's in a steady state, but the fact that we're increasing price continuously and in a sustainable way because we don't go backwards over time, is driving further margins down the road.

Got it. It's really interesting to look at how Ecolab has evolved over the years. I mean, so much of people who have known Ecolab that sanitization, that cleaning aspect of Ecolab has been so foundational to our principles. But over the years, the company has become a bigger industrial player of business that you yourself even led for several years. That positioning is really interesting, and that business has done quite well. Could you talk about, as we come through the COVID compares and that business held up very well profit-wise last year. Can you talk about what's driving the really good results that we've seen so far, year-to-date, this year? Is it a cyclical recovery in some of those industrial end markets? Is it net new business? Maybe if you could just talk about the characteristics that are driving the performance in Industrial?

Especially in Industrial, Andy. That's your question, right? So Industrial has been a strong business for us for a very long time actually. And what's pretty special about our Industrial business, to put it in simple terms, is that we've brought, in a very unique way, the hygiene capabilities, sanitation that you mentioned before with the water expertise, that Nalco had when we acquired them in 2011, bringing hygiene and water together is helping most customers ultimately produce better products while reducing their impact on the environment, while improving their returns as well at the same time. It's a different outcome if you're in a power plant or in a brewery, obviously, but the concept is the same. So it's this value proposition and especially driven by the net 0 right now, which is bringing so many customers to us or existing customers that are asking to get closer to the net 0. Getting closer to net 0, Andy, means a higher penetration of our solutions because they need much more solutions in order to improve their footprint as well. This is good for us, it's good for them. And that's the main reason why our Industrial business is doing so well and will keep accelerating in the future.

Great. And I think maybe the last question I wanted to put in front of you for the general session here was just on Purolite. But I think you talked in the presentation about kind of what you see there, the good growth profile that you see there. Can you talk maybe a little bit more in detail about some of the synergies that you see with your existing Life Science businesses and Industrial business where you could see cross-selling. Certainly, because this is a different platform, it doesn't feel like cost synergies are really the play here. This is the growth play. And so if you could just talk about the cross-sell opportunities. The growth rate that you expect out of the business to earn the IRR that you've underwritten?

Yes, great question. So it's 100% growth play with no cost synergies. There are some small ones, obvious ones, naturally. But it's a growth story. So we have really to 3 plans. The first 1 is really, as a stand-alone business, needs to remain very strong, growing fast with very high margins and keeping going up. To your point, in terms of growth synergies in Life Sciences, together we're going to get close to roughly 1 billion in Life Sciences, growing double digit with margins that are north of 30%. So just looking at the math, it's a very interesting story. In terms of direct synergies, there are 100 pharma companies out there, the global ones, for the most part. We have only 1/3 of overlap, which means that 2/3 we don't have them both. It's a -- Purolite has some of them or we have and we can bring Purolite as well to those customers. That's the most straightforward growth synergies. At the same time, we have a geographic opportunity as well. Purolite is especially strong in North America. We are especially strong in Europe, which means that we can as well cross-sell geographically. And ultimately, as mentioned early on as well, it's the value proposition. It's not just selling. So whilst 1 side plus the other 1 and it's just 1 plus 1 equal 2. Now we improved the quality of the drug that's being produced or the vaccine that's being produced as well for that matter. And third, it's adding capabilities to our Industrial business. If you take the microelectronics for instance, we do not do today as Ecolab, the ultra purification of the water that's being used to polish the silicon wafers. Well, Purolite does it. We do everything else. We add what Purolite is doing. It's a 1 plus 1 equal 3, again, in here, which is driving further growth and margins as well because it's at the same location in a very Ecolab manner as we did with water, pest or digital.

Got it. Did you want to comment on the growth rate that you're anticipating here in the next several years for that business to -- like what -- and -- so historically and what you expect? Do you expect it to accelerate to justify your IRR? Or is its historical growth rate good enough for you to achieve the numbers that you've underwritten?

It's the latter, Andy. So in our return projections, it's the current growth rate that we are seeing today, either from Purolite and from us as well, which means that if everything goes as we think it will, ultimately, so it will not only secure those returns that we've talked about, but potentially improving them, too.

Very good. All right. So just a heads up for everybody in the conference here. We're going to have a breakout room in just a few minutes. There'll be a little pause and you can all go back to your home screen, put back info to breakout. If you choose not to go to the Ecolab breakout, you have the opportunity to see presentations from Builder Corporation, from Emerson Electric, from Allegion and Heartland Express, Kingspan Group, Applied Industrial Technologies or Quaker Houghton. Thank you very much, Christophe, for joining us, and we'll see you in the breakout.

Thanks for having me. See you then.