Ecolab Inc. (ECL) Earnings Call Transcript & Summary

I'm Dan Rizzo with the Jefferies Chemicals Equity Research team. Thank you for joining us this morning. Up next, we have Ecolab. With us is John Houghtby. He is the Executive Vice President of Global Specialties. He's going to do a quick -- he's going to do a -- just an overview and go through the story and -- but there will be time at the end for questions. So without further ado, John, take it away.

Thank you very much. Good morning. So we will start with the traditional cautionary statement, well written, very comprehensive. And with that, we'll move immediately into the presentation. Just as a quick introduction, my name is John Houghtby. I'm responsible for the Global Specialty Group of Ecolab. I've got the pleasure of being with Ecolab for 29 years in a variety of our businesses and geographies around the globe, spent time in pest elimination, a former business of equipment care but also global QSR, and now responsible for our global specialty businesses and serving in a variety of sales, service, marketing and leadership roles across those different divisions. So in terms of our presentation today, we're really going to try and split it up into 2 different sections. A brief overview on Ecolab and then a little bit more of a deep dive into the Global Specialty Business. So starting off with Ecolab. As many of you are aware, we're the global leader in hygiene, food safety, water and climate technologies and services. And we really pride ourselves on the fact that we provide and protect what's really vital to life by helping our customers with better outcomes and delivering lower cost from an operating standpoint and a minimal impact on the environment. And quite honestly, we really like our positioning in terms of the impact on our customers, but also on the society and the environment at large. And in fact, when you think through some of the impact that we have, it's pretty substantial and impactful. Just last year alone, we helped clean over -- and disinfect over 60 billion hands, saved over 200 billion gallons of water, which is the amount of water that you could then serve the annual needs of over 700 million people around the globe, and also helping to feed over 1.4 billion people with our solutions and services. And as we work and drive this impact with our customers, we've also helped our customers have a significant impact in reducing their carbon footprint within the environment. Now, in terms of our market, we said we're the global leader. It is very large and what we really like about it is that we've been able to continue to expand this market over time by introducing new products, new services into our customer base. And quite frankly, we're always focused on growing our sales quickly, but we're just as equally passionate about driving our TAM even faster to make sure that we not only have great growth opportunities today, but we can continue to extend those growth opportunities well into the future. Now in terms of our strong position in this industry, that's fragmented. It's a large share. We've also established a leading competitive position in virtually every market that we operate in. Now in terms of our unique operating model, you can see we service industries very disparate from restaurants, all the way up to very complex industrial processing facilities. But it's kind of core we bring together know-how across all of them within hygiene, infection prevention and water technologies to help solve those customer challenges. And quite honestly, importantly, the business model as such is very consistent. Regardless of the end market, we look to bring premium products, combined with premium service and expertise and digital platforms to solve the unique challenges that these end customer markets have. And what we really like about the business is that they are very consumable, 90% of what we sell to our customers is consumed at the point of use, which creates a great annuity and what we believe is a fairly predictable revenue stream from a business model standpoint. Now in terms of our value and how we drive across all of these end-market systems, it's really net focusing on getting the best results for our customers at the total lowest cost and minimal impact to the environment. And we do that by bringing breakthrough technology, combining that with on-site expertise and know-how, which helps our customers deliver better results for their customers, protect their brand, and as we've indicated, significantly help them manage and reduce their cost, which in these times is a very strong driver of our value prop. So we feel that we have a very strong competitive position in the value that we drive to our customers in the marketplace, combined with our recurring revenue stream, really sets us up to be a very highly sustainable compounder of growth for the long term. Now when you look at our growth trajectory and history, a long history of driving strong, consistent, top-line growth and being able to translate that into high consistent double-digit growth year-on-year. And we're able to do this in good times as well as in challenging times. As you look at our trajectory here on the chart, even in very challenging times, like the global financial crisis, our business performs well, and we come out of those challenges navigating it well to improve our performance as we continue to march forward out of the challenging time. And clearly, the challenge of the day is COVID and inflation, right? We think we're going to continue to drive all of that performance with that same navigation and focus to navigate these challenges as well. During COVID, our Institutional division was the group that was the most impacted through the pandemic. They represent about 20% of our sales, and clearly impacted as restaurant traffic and lodging stays were impacted through global lockdowns and consumer fears of entering the public and leaving their homes. That impacted that business. However, the other 80% of our business continued to drive strong growth on both top and bottom line in that challenging time. And our real focus during the COVID pandemic, and how we wanted to really drive through that was, first and foremost, keep our team. We believe that the experience that we have, the team, the expertise of on-site delivery is a critical part of our value-delivery equation. And so during COVID, even though the Institutional division was having troubles, we kept the team intact. We continue to invest in innovation. We didn't stop that. And through that, we've been able to gain share and really set a strong recovery as we're exiting the COVID and the significant lockdowns. Now obviously, the next challenge that many of us, if not all of us, are facing is the acceleration of inflation. And here, too, our teams have accelerated and driving pricing activities to record levels to help us overcome this challenge as well. And in fact, if you look at our performance, we have an experience. We understand how to drive pricing, and it's through the value that we deliver to our customers. Historically, we have done a nice job of delivering pricing that exceeds our delivered product cost inflationary, right? And even in markets or times where our inflationary costs are actually decreasing, we're still able to be able to deliver pricing because it's based on the ultimate value that we deliver to our customers. And that's what we call our eROI. It's that incremental value that customers get based on the investment they make in terms of our programs and our pricing. Now you can see inflation has definitely reached a level that we have not seen in many, many years, if not decades, but our pricing has also accelerated to record levels as well to catch up with that. And in fact, we're projecting that our pricing will be in the low double digits for the full year. And then as we head into the second half of this year, our pricing is now eclipsing the inflation on a dollar basis, which really sets us up and positions the business to do what we really do best. And that's just to continue to drive the market, grow our TAM, continue to grow sales and leverage our unique position and competitive opportunities that we have, knowing that the macro trends are still going to favor it. Infection prevention, water scarcity and climate change are not going to go away. Those are going to continue to be challenges that our industries are going to face. And we have the unique solutions to be able to address those on behalf of our customers. And when we look at our value prop, we know that it's always resonated well with our customers, but it truly resonates even more today as our customers are looking for even better results and helping them not only with their cost structure, but their impact on the environment. So we feel real good about our ability to maintain our focus on our objective, which is to deliver double-digit EPS growth long term. Now shifting a bit into the Specialty business, which is near and dear to my heart, because that's the area that I play. We call it Specialty because we think of ourselves as special within the Ecolab family. But ultimately, when we look at this business, it's about 10% of Ecolab's global sales. And it's really the businesses that make it up, our global QSR and global food retail. Those are the business entities that we call the specialty group. Now very disparate market segments and programs, but a lot of similarities between these 2 businesses. They are growing, highly profitable businesses that have market-leading positions. They are focused on brand protection of our global giant brands that we take care of and really bring a nice portfolio of products that our customers have now determined are vital and critical to their operations, not only from results but in terms of helping them optimize their cost structure. Now similar to Ecolab, the specialty group has a very strong history of delivering growth. We're playing in a fairly large and growing marketplace, $6-plus billion and growing. And we're continuing to see opportunities to drive growth in all of our regions and across both QSR and food retail. We feel good about our growth opportunities. Now something that we find as a treasured part of being in the specialty group are the strong customer relationships that we have built and fostered with some of the largest brands and operators within our market segments. Now these relationships have been fostered over decades, some of them dating back 50-plus years, to show just how ingrained we are in their customer operations. We are fully aware and intimate on how they run their business. We utilize that familiarity and the relationship to help innovate and drive solutions for problems and opportunities that they are faced as they drive their business both locally and internationally. And we leverage that and build our business and help them support it from a technical standpoint anywhere in the globe that they operate. It's a big part of what underpins our foundation of investment, innovation and helping the overall industry. It comes enrooted in these strong long-term partnerships. Now when you look at the QSR and the food retail market segments, these are fairly dynamic market segments. They are constantly in a state of reimagining themselves, recreation, addressing to the various changes in the market dynamics, be it consumer preferences, menu, food, whatever the challenge might be. And when we look at these 2 segments, there are 3, what we would say are market dynamics that have shifted and have accelerated over the last few years that our customers are trying to navigate. Clearly, labor than sustainability and what we call convenience. Now obviously, labor is a challenge for many industries. When you look at QSR and food retail, collectively, they employ millions of associates around the globe. Labor is a critical part of their business model. And so the availability concerns that we are seeing here in North America is obviously something that they are looking and working to try and navigate through as well as the cost of labor is continuing to go up at an exponential rate. So we're working with our customers to help them manage through that labor and cost challenge, innovating solutions that simplify procedures on site, automate tasks that ultimately can help them optimize how much labor they actually need to deliver the same result within their operation. From a sustainability standpoint, again, this is not something new. Many of our brands have either both internal goals or very proud to state their public goals of their sustainability journey. And this is an area that we are able to help them in terms of some of the solutions like bringing in automated warewash to reduce energy, water consumption, right, in addition to labor consumption. But the impact that we see in QSR is pretty substantial. It was set up as an industry with single-use plastics with disposable packaging for their consumers. And we're seeing, whether it be regulatory drivers, whether it be consumer demand or even our customers' own desires to drive their sustainability journey, we're working with them on how we can improve packaging size, reuse the waste that's involved as well as the carbon footprint from logistics of shipping their programs around. And then this final trend that we've seen really take off is convenience. Again, none of it is brand new, but we -- as it's referred to as the 3 Ds of convenience, digital, drive-through and delivery. And both of these segments are impacted by this, and it's not new. They've been working on these type of initiatives for 5, 7, in some cases, 10 years that we've been dabbling in these types of activities. But during the COVID pandemic, out of necessity, these markets had to quickly adapt on the fly and accelerate their reach to their customer traffic through drive-through and delivery versus people coming into closed dining rooms as well as the reluctance of people to go to grocery stores. So more about curbside pickup delivery of grocery as well as drive-through and the delivery of food within the QSR space. Again, it was always something that was evolving, but over the last 2 years, it has become ubiquitous with the industries. Everybody has this program in place, and it is now becoming a bigger part of their business model, their operations plans, including their future facility designs, adding in more drive-through capacity, pick-up capacity. And that creates new challenges for our customers. Now they need to represent and clean not only the inside of their facility, but they also need to clean and represent their brand on the outside or in the delivery channels, and another area that we can help them with their protocols and their food safety audits to ensure the integrity of their program. Now from a growth standpoint, within Specialty, we feel good that we've got fantastic growth drivers for us. We're going to continue to edge into that $6 billion-plus in growing market share. And first off, it's share gain. We've got great share growth internationally and in the U.S. Those global giants that we have great relationships with, they're continuing to invest. They're continuing to add locations here in the U.S. They're also continuing to add locations internationally. We're seeing newcomers coming into the industry, both here in North America and abroad, and they're investing and they're expanding because it's a dynamic industry. So we've got great share growth opportunity as well as the ability to drive additional solutions into our existing customer base, right? One of those solutions, which we're really excited about, is this automated warewash because it helps address 2 significant challenges for our customers, the labor challenge and the sustainability opportunity. And this is where we bring that Ecolab DNA of working with automated warewashing technology for decades, if not close to 100 years, bringing it into this space where, still today, the majority of the QSR and food retailers are manually washing the dishes within their facilities. The wares that they use to prepare and cook food is still predominantly being manually washed. That's a lot of labor, a lot of water waste and the energy to heat up that water. So with automated solutions, we can help our customers really drive benefit within their operations. And in fact, if you were to look at just a case study of a traditional QSR customer of about 1,000 locations. This is the eROI that we talk about. It's the incremental value that we really can drive into their operation. On average, a QSR standard facility will spend about 5 man-hours washing dishes. That's 5 hours a day that somebody is standing at a sink washing the wares versus serving customers or preparing food, the things that drive the revenue and the profitability. Well, with the advent of automated warewashing, we can remove that labor. We can provide that savings back to the system to be reallocated to taking care of more profitable task, we can save on water and energy. And the other benefit that we have in a very labor-constrained marketplace, you're taking away one of the most unsavory jobs that is performed inside a QSR facility, standing at a sink washing dishes, right? So it creates a better job experience for the associate and hopefully contributes to better retention of that labor force as well. Now we're also investing in digital technologies. One that's key to our key markets is digital food safety. Our customers are very concerned about making sure that they handle, prepare, store, cook and serve food at the proper temperatures and the proper methods to ensure that there's no foodborne illness. And so partly to help with that to get a better result, but also to optimize labor, we've rolled out a digitized mobile app program that's run in-store that helps them completely digitize that process. Not only do they get a better result with less labor, but they're able to take that information and drive insights and training to improve their overall operations as an organization. And then we're also looking at great ways that we're innovating areas that matter to our customers, new opportunities or new concerns to help them in terms of driving their business. So water quality management is one of those opportunities. If you look at a QSR operation, one of the largest drivers of revenue and profit is what we would call dispensed beverages. It's -- think of dispensed soda, coffee and tea. It's a critical part of their financial equation. And so they are caring about, is it safe? Is it at the right quality because that has a material impact on their business? And so bringing technologies from our Nalco Water business, we're able to bring it in, that helps us monitor remotely, make the appropriate treatments to the quality of that water to ensure that it's maintained at the integrity that our customers are looking for. And on the food retail side, our Sterilox fresh platform, it's really targeted for fresh produce. It's chemistry and unique dispensing setup to help reduce the pathogens that are found on fresh produce, helping to make it a safer situation. But at the same time, we find that it can actually extend the shelf life of that product. So our customers are selling to their consumers safer produce, but also have a longer shelf life. So they're reducing food waste and improving their profitability. And we're looking at how we can extend that platform of technology into other fresh departments within food retail, such as seafood. So again, focusing on innovation that takes care of key issues and opportunities for our customers, but also sets up for significant growth drivers in our business. And as we look at Specialty, again, strong history of driving growth. We believe we have a strong outlook to continue that growth well into the future. Those strong customer relationships are the underpinning of how we drive innovation and solving problems. As they expand, there's clearly opportunity to grow with them but there is significant share growth, both from their investment and local and regional chains. Our robust pipeline of innovation is continuing to grow our market from a standpoint of growth opportunities. And to the core of who we are as Ecolab, we have a great portfolio of products and services that help our customers with that core value, which is get the best outcome to take care of their customers at the lowest cost and minimal impact to the environment. And we have become instrumental in our customers' operations. So we feel very robust about the growth projected for Specialty moving forward. So thank you.

Okay. We have a couple of minutes for questions. I don't know if any of the audience has any? I'm going to start. So you did mention in the Specialty QSR and food retail, I was just wondering -- you don't include hotels or full-service restaurants in that. I was wondering how come -- is there something different about that? Why it's not part of the Specialty, I guess, platform, so to speak?

Yes. We've separated these 2 market segments because their business models are separate. So part of the strategy, many years ago, was to carve these 2 segments off and then we dedicate our service team expertise, our innovation that's unique to those operations as well as the overall program delivery. Because even though a QSR might -- it's just a restaurant, it does have a different operating environment. It has a different staff turnover component. So it really was meant to create that specialization, that expertise definition, to help us accelerate and maintain the growth in those segments.

So -- and just briefly on trends, given we're coming out of COVID or at least Europeans are still kind of coming out of COVID, but there's a threat of a slowdown in Europe, concern for recession here, higher energy prices, what does QSR demand look like -- order demand look like right now? And what do you expect through the end of the year?

Yes. Right now, QSR demand is continuing to be strong. So when you look at our customer traffic, they're still maintaining good growth, good comp growth. So they have not yet seen an inflection in terms of the potential recessionary environment hitting. But I would also say is that QSR and food retail are actually quite resilient markets, right? In difficult recessionary times, they actually seem to perform quite well. You get some trading down into that space. And then on the food retail side, you have an increased consumption of eating from -- at home. So they're truly fairly resilient and right now their comps are looking good.

Okay. We're out of time. Thank you very much for your time this morning. It was very appreciated.