Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Great. Thanks for joining us for our next session today. We're very happy to have what is, in our minds, one of the great industrial franchises in the country really, if you think about the track record here at Ecolab and what's been built. And I'm very happy to have Christophe Beck, the CEO, joining us. I think what you'll see is Christophe brings an energy and an enthusiasm to telling the story, but also how many aspects of businesses that we know and commercial interactions that we have that kind of is touched by Ecolab in some form or another. And so I think it's an extremely relevant and timely conversation. And I guess the way we'll proceed is Christophe has a number of slides and -- at the beginning of the presentation. And then we'll come back for some Q&A post that and get through everything. I would also point out under the Wall Street Webcasting, there is a function to lob in some questions if there's things that we aren't getting to in our conversation. I can't guarantee we'll get to it, but we'll certainly try to meld those into our own conversation points. But Christophe, over to you. .

Thank you so much, Steve. I'm glad the technology is working well as well and that you're all doing well in this interesting world that we're all living in. And as always, honored to share the Ecolab growth story. It's been an unbelievable story so far -- almost 99 years. Now we're going to celebrate our 100s in 2023. So looking forward as well to that. Before I get into any details, obviously, I'll draw your attention on our cautionary statement, especially in these unpredictable times, pretty handy. Obviously, we saw things happening on a daily basis -- unfortunately so -- in the world that's around us. But I'd start by saying that in a world that keeps getting more complicated, at least that's the way it feels over the last 2 or 3 years, we are really pleased by the fact that what we do becomes always more needed by our customers out there. Because at the end of the day, what we do as a company, especially for the ones less familiar with our company, it's really so helping create healthy environment, being in restaurants, in hotels, in hospitals, making sure that you do not get infected or sick or that we can reduce the risk as much as we can. We help as well create systems and processes, especially in industrial setups as well, that are using as little to no water as it can be. Since we know that it's a resource that is getting always more scarce, especially in extreme places around the world. We help as well for the whole food production to produce a better food and safer food as well as it's being produced, and we touch almost 1/3 of the world food production, so with a pretty large reach that we have as a company and ultimately, with all we do, helping make sure that our customers can deliver on their climate goals since so many customers and always more are trying to reach what's called today the new net zero by whatever timing that's being expected. And what's important in our company are 2 things. On one hand is the reach, as mentioned, so touching 1/3 of the world food production, a 1/4 of the people around the world as well, 1/4 of the power that's generated around the world or over 40% of the milk that's being produced. So what we touch has a big implication ultimately. And when we look at it by the numbers as well -- well, we have our objective of what we want to deliver so by 2030 and every single year, we're looking at what kind of progress we're making together with our customers. And as you can see here, we've helped in 2020 -- we haven't published our '21 numbers yet. It's coming soon as well -- was 66 billion hands, which was pretty impressive during COVID times. We've -- had saved over 200 billion gallons of water, which is the equivalent of the drinking needs of over 700 million people. Help feed 1.3 billion people on our path towards the 2 billion as well and help save over 3 million metric tons as well of greenhouse gases. So big reach, big impact. And the very good news with our company is that when we grow our positive impact on people and the environment, we grow our earnings as well at the same time. It's been true for a very long time. As far as you can see -- and here it's starting, so in 2004, but I could go for the last 30 years as well in here. So it's been true year in and year out, even during the difficult times. It's been actually true for 80% of our business as well during the past 2 years that have been impacted by COVID. 80% of our business did really well, both top line and bottom line along the same trends as what we've seen so pre-COVID. 20% of our business, hotels and restaurants, were ground to a halt for all the reasons that we know, impacted by lockdowns in the world. And we've decided as a company to still maintain all our investment during that time, which was a key decision totally in the spirit of our company to say we will maintain our whole team when many companies out there let many people go. We kept our team. We paid our team knowing that it would be hard on the short term on our earnings, but that it would be right for the long term. In hindsight, it was exactly the right thing to do. There would have been no way we would have we rehired all the people that we would have let go at that time. It was right. We've maintained our strategic investments as well on digital, on new growth platform. We've kept our investments on innovation as well. We've built out life science, global high-tech data centers -- I'll talk more about that as well in a second -- transportation, animal health during some of the tough times as well. But when you look at the fundamentals during that time and even today, well, they have been really strong. We've kept building our new business, which is the pipeline that we're measuring every single day on how much new business versus what we lose and what's the net. Well we are at record level. Our pricing has been as well improving quarter after quarter as well, and we've kept our focus on M&A as well as you've seen -- we've acquired Purolite as well in the fourth quarter of '21. That's really Ecolab at its best: During difficult times, we stay with our team; we stay with our customers. We stay clearly focused as well on our long term, which is why I feel confident -- and very confident that for the long term, we will be back to the type of trajectory that we have seen, so pre-COVID as well, with our long-term objective that is not new. It's been true, so for 30 years, 6% to 8% organic top line and an EPS of 15% of growth over the long term. So what's helping us as well at the same time are the macro trends that are out there. The way we look at them is in 3 different categories. The first one is people health: protecting people. The second is protecting natural resources: we call it planet health. And the third is to do that in a way that is helping customers do better. So if I take them one by one, the first one being people health. Well, we've learned it a bit the hard way over the last 2 years. But before that, that was true as well with hospital-acquired infections that are killing more people in the U.S. alone than the streets are because you get infections that you didn't have when you joined the hospital as well. The health of the animals that go through the food chain as well is essential to get quality healthy food as well at the end of the chain as well, which drives food safety. And as mentioned before, so what we've experienced over the last 2 years in terms of public health, well, has made everyone very aware of the risk of infection. For everyone who didn't have that awareness, well, it's become very clear in the meantime. This is a big trend, and it's one of those step during history, awareness of infection risk and focus on protecting yourself has gone up. And the question is always, "How much?" Well, we can talk more about that, obviously. But that's the time where we have taken that opportunity where you can see how the company is focusing on innovation when things are turning for customers in a way where we can help them. And 2 years ago, well, we came with that innovative idea of providing a comprehensive program called Ecolab Science Certified that helps customers provide the highest level of protection in the restaurants, the hotels that we're serving, in a way that's good for their guests. And in a way, that's good for their own operations as well at the same time. And those sites are certified as well at the end of the day. We have over 30,000 locations in the U.S. only. Today, it has driven as well incremental business, which is even better as well. And you can see so many major chains -- of which McDonald's that has endorsed as well the programs in all their stores in the United States. The second big macro trend is planet health. I know I don't need to convince anyone on that call that climate change is a reality and that we're experiencing it every single year, wherever you are around the world. What's a little bit less known is how much water is a main driver of climate change. And as one used to say a few years ago, if climate change were a shark, water might be its teeth. Because it's what we feel first with flooding, with drought: this is how human beings feel the impact of climate change the most. But at the same time, what's less known is also that close to 25% of the carbon that's generated around the world comes from managing water: heating water, cooling water, transporting water, treating water and so on. So if you reuse water, if you reduce your consumption of water, well, not only do you address water scarcity, but you address as well climate change as well at the same time. And water is a finite resource. As we all know, all we have on earth is ultimately all we will get forever. And the problem is that by 2030, well, we will need 56% more water than what nature can replenish. That's not exactly a good news, obviously, and that's where our net zero program as a company is helping customers produce more products, better products with less water or ultimately with zero water, which is the ambition of many companies. Which leads me to the third macro trend, which is what we call business health, where the leading companies out there are setting clear goals where they want to be by '25, by '30, by '50 in terms of water impact, in terms of carbon impact as well. And that's driving obviously the demand for our solutions because many of those companies either don't really know how to get there or are having trouble to really make progress and deliver year in and year out the commitments that they've made. And the closer we get to the dates that they've said, well, the more they need as well from ourselves. The people health, the plant health and the business health trends ultimately are going to keep driving as well our value proposition, which is interestingly enough going against the common knowledge of thinking that green comes at a premium. This is not the way we look at it at Ecolab. Basically, what we're saying, if you produce safer and better product, if you reduce your usage of natural resources and impact on the environment, well, ultimately, the business is going to perform better. And that's the way we measure it with eROI, which is the direct ratio of what's the upside that you get in your total operation versus the investment that you make in the service that we provide. And our objective as a company is to drive at least a 25% return for our customers, which is a very good news, obviously, for them because the premium turns ultimately into a return, which is good. The last thing is that our market keeps growing as well our market opportunity. This is important for us, it's to add new end markets, to add new solutions, to add new geographies. And today, we serve, as you can see here is a market that's over $150 billion large. And we have 8% of that market, and as you can see on the lower part of the chart as well in here, blue is Ecolab and green is all competition, well, quite far behind, which is one of the reasons why the vast majority of the big brands out there are working with us and have been working with us for many, many years. And some have been working with us for decades as well and some even without a contract, just to name one, like McDonald. So let me give you a little bit more flavor on how we grow, because we bring simplicity in a complex world. We serve 40 different end markets. It can be hospitals, it can be a pharma manufacturer, it can be a power plant, it can be a car manufacturer, a data center and all that, those are the 40 different end markets that we serve. And we have dedicated experts for each of those markets. This is what one might think it's complex, well, it's simple within 1 division, and we share the same business model. We share the same platforms. We share the same operating principles. We share the talent as well across the company, that's where the other dimension of simplicity comes as well into play. And 90% of our revenue is recurring because those are consumable products as well. The second dimension is that we leverage enterprise technology. Our chemistry, that we like to call connected chemistry, that you can trace with sensors through customer locations is a technology that we can use across the enterprise. In terms of technology, the same: dispensing technology, sensing technology. This is a technology that we can use across all the 40 segments. And last but not least, all and always more of those connections or customer locations are connected to our cloud, ECOLAB3D, which is something that we share as well across the company as well, and we share best practices and talent as well across the company. And at the end of the day, we bring it all together with new technology know-how in those industries, predictive insights are coming from data technology and personalized service as well with experts coming at the location, bringing all together and helping the customers to produce better outcomes or better results at the lower total operating cost by reducing the impact on the environment and the labor as well, which is our value proposition. The other element which is interesting to know as well is that usually what we touch is the whole operation of the customer, but the cost that we have is a very small part, usually less than 5% of the total cost of the customer. So that's why this leverage and this return is so interesting for customers. And if I give you just a few examples in here, I'll just take one like a power generation plant. It's a nuclear plant in that case, by the way. With all the services that we provide of data technology, of cooling tower technology, of pretreatment and all that, as you can see in that plant, we could reduce massively the amount of water that was used, the energy that's required to manage it as well. It could enhance the productivity, the power that's being generated as well and ultimately driving a $5 million total value delivered as well, which is a 25% return annually, so for the customer. I can talk about the data center total different industry, obviously, here, but the data center uses as much water as 80 hospitals, so collectively, and that's a market that's booming. As you can see on that example, we can reduce the water being used moving towards 0 as well, reducing the energy that's being required and the greenhouse gases that are being produced as well. An $8 million that has been delivered at 60% return, which is a hell of a delivery as well for this specific customer. And we keep building new platforms as well. We did it a few years ago, when we brought water and food safety together, which has been a great growth driver for our company. Well, we're doing the same with the acquisition of Purolite that we did just in December, which was a great company that's a high growth, high-margin business that's joining us, that's helping us build a new platform in many industrial activities, capturing lithium from brine to produce our EV batteries as well. But last but not least, it's doubling down on our Life Science businesses that has been very successful for the last 5 years since we started it as well. And addressing the pharma market that, as you know, is a huge market, growing fast with biopharma becoming the larger part over the next 5 to 10 years as well. Which is exactly where Purolite is playing as well since it's purifying the end product, while Ecolab is making sure that the environment where it's being produced is safe. The way we do it -- I think that by now, you have understood as well that we help our customers becoming more sustainable. So we like to see ourselves as the most sustainable company as well out there. For our own operations, I won't go through all the details. You find that in our ESG reports, obviously. We've clear goals. We've clear goals year after year, and we deliver year after year as well and '21 is no different, we've made good progress as well on that. But at the same time, which is even more important is how we help our customers reach their own ESG goals, which is becoming always more important and a big driver of our growth as well going forward. All that leading to a very strong long-term financial performance, which is the objective, as I shared with you as well. So 6% to 8% organic growth, 15% EPS growth, getting to a leverage close to 2x and really driving high cash flow with a high conversion rate always close to 100%, which has been true as well. So for many, many years, with clear as well. So cash priorities, as you can see here, which have driven very big returns to shareholders, both in terms of dividends and share repurchase as well over the last 10 years, almost $9 billion have been returned to shareholders. So at the end of the day, we like where we are -- it's a difficult world, obviously out there, but we like even more where we're going. We are a global leader with a small share of a huge market. We're serving fundamental needs of our customers and people as well. We have a strategy that has been proven to demonstrate as well. So very good results as well. We have great margin opportunity that are as well out there. And we have the means as well to get to the place we want. So if we don't exactly like the world that we operate in, so right now, what we can control, we like a lot. And that's always a question of time ultimately that when the world stabilizes and our fundamentals keep moving the right way, well, that's where you create where we create. So most of the value, we've seen that over the past crises as well as an organization. So if there is any time to think about what kind of investment Ecolab could be, well, today, it might be a very interesting one for sure. So with that, Steve, I'm going to stop sharing and we're going to open up for Q&A.

Thanks very much, Christophe. It was a rapid fire, 10,000-foot view, but also one that I think gives people a really good in-depth sense of the company's missions and your priorities and where you're headed. On the point of when you mentioned off the top, the 20% of the business that was impacted, I think, to some extent, investors have kind of thought about Ecolab as kind of a recovery play, if you will, as that 20% comes back. But the thing that's interesting to us is, if I think about what the earnings power of that business was pre-COVID and then I roll that forward, what I'm missing is -- your market share is improving and you're improving the business at the same time and all the investments you've made between your people, your ERP system and everything else. Maybe you could talk a little bit about that. I thought the point that foot traffic in restaurants, for example, is down kind of mid-30s, but your share, you were down kind of high singles is really telling. And so if you could talk about that because I think people really struggle with this whole idea of what the new normal looks like for Ecolab certainly in those impacted businesses.

You've described it really well, Steve. And it's important to keep in mind as well this other point that during COVID, we've maintained the whole team. And our team is large. It's over 10,000 people. So it's big in that business because we knew that we would need that team for the future as well. And we didn't know how long it would last. Obviously, we thought COVID would be just a few weeks, a few months in 2020. And well, things have changed a little bit in the meantime. But still, it's helped us to drive share. You described it really well, so our performance versus the market performance. We've worked a lot to improve the margin of the business, the productivity of the business. So as the market recovers, the performance of the business is going to be better after COVID, if I may say, than it was before COVID, which was a good performance to begin with as well at the same time. But we expect our institutional to be back to 2019 levels during the second half of this year. That was a bit later than we would expect from a market perspective. . But it's -- this question of time, Steve was saying, well, it's when you look at where we're heading, ultimately, it's going to be better than pre-COVID. And the same for the other businesses that have been much less impacted, obviously, by COVID -- many have been positively impacted by it, so health care and life science, obviously, hugely in 2020. And then you have the inflation question that's coming into it, obviously, where we're driving pricing, really making sure that we can stay ahead dollar for dollar, which we have in '21 in a year where we thought there would be no inflation by the way. And well, we know what happened since the second quarter of 2021, while the whole pricing that we have driven, together with the recovery of institutional and the improvement of productivity, you bring all that together and mid- to long-term good things are going to happen.

Any insights -- acknowledging that there's a lot of volatility in the world today, if not in your underlying business, but any insights on kind of what you're seeing real time? If I was to think, as we've come out of this Omicron wave, clearly, I mean, I'm assuming your hospitality business is kind of improving as you thought it would: Foot traffic, restaurants, everything is improving. And then maybe you could talk a little bit about, I'm assuming we're in for probably a period of somewhat tough metrics in terms of European industrial production here in the next couple of months and quarters. And so can you talk about how that mix plays in your business? And anything kind of more real-time that you could share about what you're seeing for the business would be helpful, I think.

Yes. I'll start by saying that it's -- it's very hard to predict. And in hindsight, nobody was able to predict anything because we couldn't predict what would happen, so in Eastern Europe as well. So since it's the last 2, 3 weeks, that it happened. But that's 1 of the reasons why we haven't provided guidance as we've done it forever as a company, because when we provide a guidance, well, we stick to it. So we provide a guidance when we know, and when we don't know, we're not going to make it up and provide a guidance. But we're providing a direction, which is what I did as well as during the Q4 earnings. And so far, nothing has changed, even though the world has changed quite a bit around us. So with what I know with what we're doing today, so it's kind of no change versus what I've been sharing as well so with the market. When I look at the top line, for our business. It's been very healthy, very strong, and it stays healthy as well. So I don't know how the world is going to turn in the months to come. Steve, it's going to depend as well on how crazy or crazy year it's going to be in Eastern Europe, what are the implications as well of all that in the European economy. And for that matter in the U.S. economy at some point as well. But with what we know right now, I like the business momentum that we're having. And I don't see any big change in the foreseeable future. The big question is on the inflationary pressure, which, as mentioned before, we didn't plan for any inflation in '21. And we ended up with 10x more what I thought would be -- and that's how we draw pricing. So we've demonstrated that we can react and we could get pricing equivalent to what we had as an inflationary pressure. And I see the same happening in 2022. It's hard to get that straight quarter by quarter. But for the full year, this is our mission, and we're good at that. So overall, I feel reasonably good with what I know now. But to your point, Steve, there's a lot we don't know. But so far, progressing well.

Right. Well, to your credit, over the last couple of years through this period of uncertainty, I think back, there was a number of times where you could have declared victory, right? You could have said, "Well, the worst is behind us." We're going to -- all of us kind of said that at some point. And I thought you could have at least guided some stronger recovery in institutional. And I think if anything, the team has done a good job from our perspective, of keeping expectations in check and being very sober about the outlook and the uncertainties. So to your credit on that. I was wondering if we could talk a little bit about health care and life sciences. On health care, we posed this question a number of times, which is I have to believe that the entire industry, and I think you mentioned it, is going to be under different regimes and different standards of cleanliness moving forward. And what are you seeing in that business? And I know it's been hard for the -- for investors to see the improvements in the underlying business there as well because you're annualizing over some of the pandemic impacts, which we're coming out of now. So we'll start to see more of kind of the organic growth algorithm that you talk about in that business. Maybe you could talk about what your health care customers are seeing and saying to you? And again, what is the outlook for that business from your perspective?

It's a business that I'm less familiar with, Steve, because I haven't worked in that business, but it's a business I like a lot. So as always, with me, you're going to get the true facts here. And it's a business that has taken more time to get to the right place than we would have expected or wished. I'm not going to hide that either. But when we think in terms of what we're trying to accomplish with health care, it's to reduce hospital-acquired infection, to reduce the pain on people and for that matter, the cost to hospitals as well, which is what's driving them, first and foremost. It took us way too much time. And I think we are kind of a midway on that process. Here, I'm not going to declare victory at all. So if we're growing mid-single in health care, well, it's -- it's okay. I wouldn't call that great, honestly. We still have some work to do. But what's really good for us are two things. On the one hand is that patients have become way more aware of the risk of infection because of COVID. And that's always been true, the risk was there, but the awareness was not exactly there. Now people are thinking twice before they go to a hospital and saying, "Okay, am I going to get sick or not of something that I'm not having?" So that's a new trend that's helping us because patients are asking hospitals to become safer from an infection perspective. . The second one is that we're starting to get our act together, which is good. We were having too many kind of -- a lot of product offering versus a comprehensive offering. And when I look at the programs we have, so a program being an Operating Room Program or a Central Sterile Program as well. Those ones are doing really well. What's important for us is that it become 100% of our business. And it's that of -- half of our business today. We still have some work to do here. So I still believe we're on the right track. I still believe it's going to get to the right place, but we're still on that journey too, as well, and I want to be very clear here. On the other hand, Steve, and I'll just pause after that. Life Science has been a great journey over the last 5 years. It's been a business we started almost from scratch 5, 6 years ago. It's a $300 million business, growing double digit, with huge margin. And together with Purolite now, it's turning into a hell of a story. So this one has taken off much quicker, and I believe is going to stay ahead of health care forever.

All right. I appreciate your candor on some of the challenges in health care and some of that. I mean I think the -- on Purolite, I thought what was interesting is I think on the fourth quarter call, you were asked about the progress of Purolite even though you'd only had the business for a couple of months at that point. I think one of the things you said was just -- I need to stay out of their way and make sure they have everything to do what they're doing because they know what they're doing. And it kind of sounded the way Warren Buffett talks about after he buys businesses, right, is buy good managers and kind of make sure they have what they need but stay out of their way. Is that how -- as you think about Life Sciences moving forward, is that the type of model that you want to apply, that this is adding platforms to your existing business and then extracting kind of commonalities and integrating with the other parts of the business fully over time? Or is that -- is there replicability in that model as you talk about it? Or -- and again, you could talk a little bit about how you think about that business and what it means? And again, because it is the first deal you've done as CEO. So I think it's also people are maybe reading into your approach here on the M&A piece of the growth story.

Yes, absolutely. So it's early, so it's been 3 months now. It was December 1 that we closed the deal. We've always been over our history, as you can see with that pie chart, are getting bigger. We want to increase and grow the TAM that we're addressing. And that's a perfect example as well of it. But at the same, we want to create a new growth platform. I had the chance to do the Nalco integration as well back then, which was driven by this idea of saying hygiene and water are directly related. And if we bring both of them together -- and to be honest, it even came from customers saying, "You should do something that gets together because you need but to get right hygiene and to get right hygiene, you need a lot of water." So you have a problem in here that we can address, and that's exactly what we've done and the rest is history. In terms of Life Science, the world is split into the ones that are making sure that the environment is safe when you produce the production line, the clean rooms, whatever you want to call it, and then the product itself is a different industry. Purolite is bringing both together. So the outside of the product, the environment; the inside, the product itself as well, bring it all together. No one else can do that. And interestingly enough, we can add new technology, new offering to both sides, environment and product as well at the same time, which is exactly what we will be doing in the future. And the more we dig in that business, the more we see opportunities. But I want to take time to do Purolite well first. Integrations always take time. They never go totally straight to heaven, as we know, and I've done many in my life as well. But it's been a great story so far. And last thing I'd say Steve, as we've said, so it's going to take us 6 to 8 months to get the capacity liberated because we're capacity constrained, which is an interesting problem to have. We're close to being done with the new plant in the U.S. and the extension as well in the U.K. Well, that's going to open up some very interesting growth floodgates in the second half of this year, which are going to turn into very good news as well for the Life Science business.

That's great. Well, I think -- I mean, I think with that, we will -- we'll wrap. I mean I think that you've given not only a great overview of the business, but some of this detail in terms of how you're blocking and tackling on a daily basis in what is clearly a volatile environment. But I do appreciate your candor and spending some time with us today.

Thank you so much, Steve. It's always, for us, important to focus on what we can control, the fundamentals of the business, the momentum, the new business, the pricing, the innovation, the team and that we like a lot. The outside world, well, will evolve. But when I look to the long term, really bullish about where we're going. And I have no doubt that we're going to get back to the trajectory that we had pre-COVID as well. So thanks for the time. Always a pleasure to see you Steve and all the best.

Okay. Thank you very much.

Thank you. Bye-bye, everyone.