Ecolab Inc. (ECL) Earnings Call Transcript & Summary

So I believe that we have the presenters for our next company. We are going to follow up with Ecolab. And it is now my pleasure to introduce the Investor Relations team at Ecolab and to benefit from their deep knowledge of the industry. Mike Monahan, who joined Ecolab in 1985, is Senior Vice President of External Relations, a position he has held since 1992. During his years at the company, he has been involved in strategic planning, corporate development as well as treasury. Mike has an infinite knowledge of the company and its end market. And Andy Hedberg joined Ecolab in 2016 as Vice President, Investor Relations. He helped develop and execute the company's global investor relations program. Prior to Ecolab, Andy was an equity research analyst at Citadel Investment Group in Chicago, where he followed the financial institutions and helped manage $1.3 billion market-neutral equity fund. So Ecolab's focus is on cleaning, sanitizing, product safety and infection prevention products and services. The company works closely with customers delivering programs and services to the foodservice, food and beverage processing plants, health care, hospitality and industrial end markets. In addition, they offer programs helping customers reduce their water and energy consumption, which we know is a big topic of sustainability nowadays. Ecolab has 287 million shares outstanding, a stock price of around $158 a share which is falling, a market cap of $45.4 billion and net debt of $8.4 billion for an enterprise value of $53.8 billion. And so now, Mike, welcome. We are looking forward to benefiting from all of your experience.

Well, thanks, Rosemarie. We appreciate the introduction, was very generous. So thank you very much and our pleasure to be here with you today. So thanks, Rosemarie and Wayne.

All right. So we would like to start off by looking at Ecolab's overall strategy, emphasizing clean water, safe food, abundant energy and healthy environment. So can you give us the company's philosophy behind these important topics before we look a little closer at your operations.

Sure. Thanks, Rosemarie. One unique thing about Ecolab is since our founding a century ago, we've been involved in ESG whether we knew it or not. I mean, the origins of the company were to help customers get the best results by helping reduce their water and energy, and we've been doing that for a century. And so it's really led us to this position where we have a very strong ESG footprint. And not only do we do a good job internally at Ecolab, but we have a leveraged effect on the rest of the world because of our customer involvement. So in 2020 alone, we helped our customers manage over 1 trillion gallons of water. We helped them conserve 28 trillion BTUs of energy. And through that, we helped them reduce 3.5 million tons of GHGs, while at the same time we protected 1/3 of the world's food production and help prevent infections by cleaning 60 billion hands. So again, it's, I think, a powerful impact, leveraged impact on the rest of the world. And we're doing this really through, not only our advanced products, but core to this is our 25,000 field associates around the world who help businesses remain successful at the roughly 3 million locations that we serve. They bring deep subject matter expertise to our customers with breakthrough technology and making sure that we've got the best products and the best services and practices that we've gathered from customers around the world and developed ourselves to bring those to customers to benefit their operations. I'd say rounding that out is we have about 100 billion customer data points we gather every year from the various devices we have in the customer sites. Through these data analytics, we're able to help customers understand what their gaps are versus best practices, track problem areas or units to identify them early in their enterprise, document how much more opportunity they have for improvement and so forth. So all this allows us to deliver on our promise of bringing customers the best results, optimizing production quality and efficiency at the lowest operating cost using the fewest natural resources and reducing their impact on the environment.

That is quite a plan. So looking at your largest segment, which is institutional. It has a big presence in the foodservice industry such as full service, quick-serve restaurant, lodging, cruises, recreational park, and we can think of Disney. Obviously, these areas were affected by COVID-19. So during the first quarter call, the company mentioned that the recovery has been underway, but kind of slowed down during Omicron. Can you give us a feel for the initial strength of that recovery, the Omicron impact and what you are seeing recently? And we can tack on the potential impact from Russia and the Ukraine situation, which is going to affect all of these industries that institutional market is operating in. I know it requires a crystal ball, but we'll take yours.

It's a healthy and broad question, Rosemarie. So just a little background. When COVID hit, it had a diverse impact on Ecolab, 80% of our company actually saw their profits up 14% in 2020. It was really that institutional business you referred to, Rosemarie, that was hurt by the social restrictions and mandated lockdowns, and we saw the profits there plummet in 2020. We took a lot of aggressive actions in 2020 to improve our competitive advantages. And through that, in 2020 and 2021, we're able to drive record new business wins, kept our strategic product and technology investments, guaranteed the pay for our salespeople to make sure we have retention of them, while at the same time cutting down critical costs. These helped drive record new business wins, as I mentioned, in 2020 and again in 2021. And further, in 2021, we're pleased that despite continuing COVID and rising raw material costs, we were able to rebound and have our earnings up double digits. So you're right that as we saw that improvement continue through 2021, we did have a couple of subsequent waves of COVID, a third and fourth wave. That most recent one, Omicron, certainly had an impact on the December, January results around the world, started to recover back in February. So we're starting to see things come back again just in time for the Russia-Ukraine incident. So overall, we were seeing our industrial side of the business and the other parts of the business, that 80%, they're continuing to crank along really well, and we're seeing a great recovery in the institutional division as those markets are recovering. So now moving on to the more current side as you said, the shorter-term unknowns are really what's going to happen with raw materials and Russia. So starting with raw materials, clearly, they have risen dramatically in 2021. They're expected to rise further in 2022. The Russia-Ukraine impact on oil will probably mean all raw materials for companies are going to rise. We're already seeing inflation continue to rise across the board. Gas prices, I just noted, have risen significantly over the last few months or last few weeks. So I think in reaction to that, what we can say is, we've been raising prices aggressively. We're at record pricing. As oil prices continue to rise, as raw material prices continue to rise, we'll have to raise our prices again. So I think if you look at our history, though, that in the 30 years I've been at Ecolab, we've successfully managed each one of these. We raise our price. We get it. So it's not a question of if we get price. We do get it. It's just how fast you get that pricing and the margin. And in the environment that we've had for the last couple of years, that's been one where raw materials have escalated so fast, we're always playing catch up on that. So we started to see some margin improvements. In 2021, we just about equaled the raw material dollar increase and the expectation going into 2022 is we'd start to get some margin back. We'll see what happens now with raw materials and the Russian thing, but it's still a matter of when we get it, not if we get the margins back. And again, we'll be aggressive on the pricing. On the Russian invasion, to begin with, Russia, Ukraine represents maybe 1% of our sales, so a very small part. We don't do any material sourcing, manufacturing or other impacts from those countries. Further, we've suspended operations that are not essential to the business. And we are continuing though essential humanitarian services in health care, pharma, food and water in Russia. So it's a pretty low level at this point. But again, in a period like this, I think, where you've got so many unknowns in the economy, companies with proven business models like ours, strong sales and significant margin leverage seem pretty attractive. So net, I think we're well positioned for recovery. I think we're in a good defensive position given where we are with raw materials and the conflict in Russia and the uncertainty around that. So overall, we're feeling as good as we can, I think, in an environment like this.

All right. So on the industrial side, Ecolab's major emphasis is on water, food and beverage, downstream energy and paper. Can you touch on the environment for food and beverage in particular? Have you seen any change in trends making Ecolab more positive about that industry going forward? And I guess maybe this is when you want to touch on the Ecolab Science Certified program.

Sure. So for us, food and beverage is a division that serves food processing plants. So we're serving people, beverage companies, brewing companies, food processors, et cetera. And what we're providing them is the cleaning and sanitizing products they use for the facilities to enable the safe production of those products for them. That business was a pretty steady mid-single-digit grower before COVID. When COVID hit, we saw impacts on several markets. In the protein industry, they had substantial worker shortages. In the dairy industry, the school lockdowns had a big impact on dairy consumption. And then in certain countries in Europe and Latin America, they actually shut down beverage and brewing plants during the lockdown. So through COVID, they had some tough market conditions. Now we've seen those have now opened up again. We think they're back on path to get back to that mid-single-digit growth. And we think that's where they'll be for the long term. So that's kind of the story on food and beverage. So we feel good about that business going forward and the ongoing needs for the world where you've got more people, greater food needs, greater food safety needs, greater protein consumption, which again requires greater cleaning and sanitizing, et cetera. So it should be a good business for us going forward. Ecolab Science Certified is a different program. And that was really geared towards restaurants and hotels. It's one where our customers in that period of great uncertainty as customers were uncertain about venturing out in 2020 and 2021 that these customers of ours, the restaurants and hotels, wanted to assure the customers they had safe environments. So one of the things that we offered to do for them is this program, Ecolab Science Certified, wherein what we do is we go to the customer site and we evaluate what their needs are, specific needs for a specific property. We develop a list of recommendations for those products that would provide a complete set of solutions for the customers using all hospital-grade quality products. We then train the people on the proper use of it. And then we come back and audit it each year to make sure those people are using the right products in the right way, et cetera. And so with that, we think we're able to provide the consumers the seal that assures that they are getting an environment where the right products are being used in the right way and is being checked by a third party to help them. So far, we've got 170 customers with that. It's garnered about $50 million in annualized new revenue for us. We're continuing to see that program expand. I think that we'll wait to see what happens when COVID ends and how the program develops after that. But so far, it's been a great success for us.

All right. And another area of importance this quarter due to its anticipated scarcity, and that has been a major focus on a global basis. Can you discuss some of the trends and opportunities for Ecolab? How does it help customers in multiple industries reaching their water reduction goals? And can you help us understand how you help those customers reduce their energy consumption as well?

Sure. Great question. Thank you. Start with the UN says we'll need 56% more freshwater by 2030. And as we know, there is no more freshwater available. Further, about 20% of our freshwater is undrinkable. So we're going to need to manage what we've got much, much more efficiently going ahead. Our customers, industrial customers tend to be large consumers of water in the production of their products. And with the rising cost and availability of water, they're very focused on ways that we can help them reduce their water, reuse their water and recycle their water going forward. So that's our focus with them. So what we'll start with, with a customer is typically we'll do a total plant assessment. We'll go into each plant and we'll assess their total water consumption from the input water, to the processed water, the utility water used to heat and cool the place to the wastewater. And we'll inventory all of that and we'll make a list. One list will be all the things that we can work with them to solve. There's going to be another list of things saying that we noticed these water areas that are inefficient and problems for you. We don't serve those, but here's a list of vendors you could go to. So by doing that, we think we're giving a holistic solution to a customer where we can show what we can do and then recommending some partners for areas that we don't typically cover. And through that, we then generate that product list for them. We work with their people and training them on the products and implement them. So for us, it's always going to be using those tools to fully understand the customer and work with them to solve it. So for an example, we worked with ADM over the last decade. We have over 200 projects with them. And as a result of the real-time monitoring we do for their cooling systems, we're using gray water in their processes and increased their water resiliency, we've resulted in annual savings -- these are annual savings for them -- of 2.3 billion gallons of water, 159 billion BTUs of energy and 70 million pounds of CO2. So that's a real-world example of what we've been able to do with a customer on an annual basis.

That is terrific. I believe that Wayne now has a couple of questions. Wayne, do you want to go ahead?

Yes, sure, I'll jump in. Yes. Ecolab has been focusing more on investing in digital and automation in order to help the company and its customers increase efficiencies and lower costs. I was fortunate enough to join you, Mike, in the company at the Investor Day in September and toward the R&D lab in Eagan. Can you talk about some of the more exciting products in those areas in automation and labor reduction? Can you also bring us up to date on sustainability solutions, focusing on reducing water and energy usage?

Sure. Thanks, Wayne. Good to see you again. So for us, probably our largest digital presence is in industrial, and that's because industrial customers, boy, 20 years ago, started to get focused on how do we make our operations more efficient in using digital technology. So at that point, it was pretty early days when you had expensive modems and expensive monitoring equipment and expensive lines to get this data real-time. But you could afford it because with a industrial customer of ours, you're probably dealing with several hundred thousand dollars to several million dollars of volume from them, and you can easily cover those. Over time though, as we know all those costs for data discovery, data transfer have dropped dramatically. And as a result, we've been able to open up that market more towards our institutional customers. So industrial, I think we've got something like 30%, 35% of our customers with digital devices in their sites that are dispensing equipment and monitoring their operations. In total, I think we've got for our company around $2 billion of revenue that are digitally connected or enabled. So it's a pretty good presence, but it's primarily in the industrial space. We're also moving now to the institutional space. The institutional customers, meaning restaurants and hotels, first embraced digital solely for top line stuff. So it was all the apps that we have as travelers for book a room at a hotel or make a reservation at my restaurants. They were really focused on the top line. And starting about 2018, they started to focus a little bit more in their operations simply because unit growth was starting to slow for them and so they started to look at profitability. And one of the things they want to do is start to monitor their back of the house. And again, that's something industrial customers have been doing for a decade or 2. It was new for institutional. However, just as they were launching on this, COVID hit in 2020. And that kind of took, digital took a back seat to them as they were working through the COVID things. We think starting to come out of this, though, we're seeing greater interest in digital from our institutional folks. We have several hundred thousand customers in our institutional business that have digital connectivity. And we're ramping up our abilities to continue to monitor information and provide that information back to them. So for all of these customers, with this digital information, we're able to bring back information to them on their operations, as I mentioned, identifying problem areas, risk areas, monitoring data analytics for them where they can quantify the opportunities and successes that they've had and present it that way. And so that's going to be a great operation for us. In terms of some new stuff, Wayne, I think as you saw at our Investor Day, one of the things that is kind of new for us is while we've continued to roll out more digital devices. We've continued to update our mobile apps for our salespeople so they can do account management, alarm management, order tracking, all that type of stuff that they do. But I think what's kind of new for us over the last few years and accelerated, particularly during COVID, was the use of mixed reality. And that's where we're taking HoloLens and RealWear to plants and the customers where initially in COVID, they didn't want third parties involved, but they needed the technical expertise. And this is where HoloLens and RealWear were particularly advantageous to enable us to have an expert in a remote location actually seeing what the customer is looking at and give them advice on what to do. And we're finding this is going to be not only an enhancement, particularly for customers that have those concerns about third parties, but also obviously for productivity for our folks where you could have a subject matter expert based in the U.S. looking through this at a customer site in Southeast Asia without having the transportation necessary to do that. So it will be a great productivity and I think, advancement for us with our business.

That's great. And yes, I saw some of the digital solutions with the boilers for the building in your basement there and it was really amazing. Shifting to health care, and we know that's not a new focus for Ecolab, but the sector has benefited from COVID and the need for disinfection. But then can you talk about some of the more recent trends in the different areas such as hospitals, senior facilities and other areas of focus in health care?

Yes. Thanks. Well, what we're seeing is that as COVID cases start to decline and become less lethal, hospitals become less stressed. And with rising surgical capacity, which we also serve so that's good for us, but they're also seeing their staffing issues ease as well. And so that's good news for, I think, the hospital side. On long-term care, we're starting to see occupancy slowly start to increase again. As you recall, during COVID, there were some substantial reductions, et cetera, and closures of some of those places to new patients. We're starting to see that slowly expand, but that is one where they do have labor issues. So that's a continuing focus for them. And then in facilities like sports arenas, entertainment, stuff like that, that's also recovering. So again, for all of these areas where, especially where labor is tight, our labor-saving products are particularly key for the customers and a real advantage for us.

And I mean, you have recently separated life sciences from health care. So life sciences is a reasonably new area of focus for Ecolab. You recently acquired Purolite, which brings new technology to the fold. Can you talk about the main industries the company is emphasizing, the growth potential, the products and services offered and what Purolite adds?

Sure. We had served the life sciences industry on a more or less ad hoc and unfocused way prior to 2018. But as we looked at the industry, we saw the potential of it and saw what we had in terms of our technology, we decided, let's focus this by creating a separate business with its own team, sales force, R&D, et cetera. And we created that with life sciences by pulling it out of a couple other divisions. With life sciences, what we're serving primarily is the pharma and personal care industry -- this is before Purolite -- with cleaning and sanitizing for those plants given the high standards that they have, which is well above, I think, some of our other customers. And we're able to successfully do that. But we were kind of narrow in the life sciences area in that sense. And so what we want to do is build out a better platform for life sciences by expanding our offering to make us more significant to the customers. And what we found with Purolite was a great business. It provides purification, separation solutions. So not only for the pharma manufacturers can we clean and sanitize their operations, we can also help purify and separate the solutions in part of the production process for them. The market that Purolite serves is about a $5 billion market focused on biopharma and industrial. We're going to serve both of those, but our particular focus is on the biopharma side. Biopharma is growing at about 15% a year. So it's fast growing. There's only 2 real players in that area, us and another company. The other one has some capacity constraints, and we've got additional capacity coming on stream. So we think it's an opportunity for us to establish our strong position in the biopharma area over the next year or so as we continue to roll out that additional capacity and then continue to grow that rapidly over the next 5 years. It's a terrific business in the sense that 95% of Purolite's revenues are consumable. So that gives us a great recurring business in that area. And we'll also be able to expand, I think, into some industrial applications with that, too. But the primary focus will be on biopharma.

All right. That sounds like an exciting project. How large a business do you think it can reach and how long will it take?

Well, it's about a $400 million business today, and we think it's going to grow in that double-digit area for the next foreseeable future, for the next several years at least.

And one last part, piece of Ecolab's operations we haven't touched on is pest elimination. So this segment has been a standout. It is a natural fit, obviously, with a hygiene focus of all of the company's customer base, whether they deal with food, lodging, health in general, we don't want to see any of those little creature marching around. So what is the strategy to grow the business outside of its existing customer base and what are the M&A opportunities in that area?

Well, actually, with pest, we're really following our classic circle the customer strategy and leveraging the existing customer base we have. If we look at the industry, I mean, pests love to shelter in buildings. We all know this. From mice, cockroaches, they want to come into a building. And essentially, every single Ecolab customer has a building. And you can't have a healthy environment, a clean and sanitized environment if you've got critters running around there. So every building needs pest elimination. So we think we've got a tremendous opportunity of leveraging the base that we have within Ecolab, our commercial base to continue to grow that business. We're not really interested in residential very frankly. We want to focus on the commercial side of the business. M&A in this area is obviously of interest to us. We did a deal a couple of years ago, bought a few companies. But you have to be pretty selective in pest elimination because it is such a great business and the returns are so good that the valuations get quite high. And so we have to be disciplined regarding that. So we'll continue to look for acquisitions. We're looking globally for those in pest elimination in commercial pest elimination. But we're going to be very selective and watch our financial exposure, financial risk.

You hear a lot of companies say that they're building a better mousetrap, but I saw Ecolab is literally building a better mousetrap.

Yes. We are. Yes. We're starting to add technology to that with remote monitoring of traps, et cetera, which is really going to be interesting. That's going to be, I think, a big improvement for customer hygiene but also for our own productivity in those operations, too. So we bring technology even to pest elimination.

All right. And since we are talking about acquisition within the pest world, can you talk about your allocation priorities, the most attractive areas for adding bolt-on? And Nalco was your last really large acquisition. Well, I guess Purolite comes close. But what is your appetite for anything that is substantially larger and leveraging you to a substantially higher level than you currently are.

Well, to start with cash priorities, they are the same as you've heard us talk about forever, Rosemarie, which is invest in the business, number one; number two, continue to grow the dividend in line with earnings; number three is M&A; and number four is share repurchase. If we look at our long-term targets for leverage, we want to be in the 2x area, and that's where we've been certainly for the last several years. We do believe in having a balance sheet that allows capital efficiency while at the same time allowing you flexibility for strategic opportunities. So you're right. We recently did Purolite, which we think is a terrific strategic add to our business, a great growth engine. To do that, we levered up to about 3x net debt to adjusted EBITDA. However, we also said at the time of the acquisition, we continue to believe that we'll get that back down to the 2x in the next several years. I think after we did the most recent acquisition in 2013, where we went to 3x, we were back to 2x, I think it was within 3 years. And I think we'll be on that similar type of time frame as we expected for returning leverage back to that ideal area for us. Obviously, our appetite right now is across the board. We're looking at all of our businesses in all of our regions. If we look at the mode, though, for acquisitions for us, what we've typically done, they're typically small bolt-ons. I'm saying $30 million, $50 million type of stuff. So we're going to do that, I think, while at the same time we're deleveraging the balance sheet. Again, we want to get down to that, back to the 2x. We'll probably do some smaller deals along the way. If the most absolute best deal ever and if all the right metrics and everything worked came along, we'd certainly take a serious look at it. But right now our intent is to balance deleveraging with selective M&A.

All right. Well, Mike, it looks as though we are running out of time, but it was a pleasure to have you with us today. As usual, of course, your input was valuable. We look forward to seeing you in person at some point. And Mario is actually joining us in thanking you for participating. You have been a pillar of Ecolab for almost as long as I have been to the specialty chemical industry. So thanks a lot and see you soon. Bye.

Well, thanks, Rosemarie. We go way back, and time always flies with you. So thanks for your time. Great to see you, Wayne, and best to Mario.

Thank you so much, Mike.

Bye.