Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Great to see another full room here at Baird's Global Industrial Conference. Thank you all for joining us. If you're in the room for Ecolab, you're in the right place. I'm Andy Wittmann. I'm the senior research analyst at Baird covering Ecolab. Very happy to be joined by Christophe Beck, the company's Chairman and CEO. Christophe is going to take us through a full company presentation today. We might have a little bit of time for questions at the end, but do remember there's also a breakout session that we'll be hosting for Ecolab following this presentation if we have other follow-up questions. So, Christophe, why don't you go ahead?

Thank you so much, Andy. Thank you for everyone attending us today. Always a pleasure to share our growth story and how we're helping 3 million customers around the world produce better products, more products, while reducing the environmental impact and the cost of their product as well at the same time, and I'll come back to that naturally in a second as well. Obviously, going through the cautionary statement, especially now talking about the future a little bit unpredictable at times as well. You're familiar with it. I won't spend too much time as well on that. So looking at the world where infection risk has gone up. We've experienced it, obviously, with COVID over the past few years, but also from a food safety perspective as well. So I've seen many companies struggling sometimes making sure that the food that they were producing or that they are producing is as safe as it should be for consumption as well. When we think about water scarcity as well, I'll come back to that as well, a big deal for many around the world and a deal that's getting bigger. As we know as well on climate change, that's not a risk that's going anywhere soon, unfortunately. Well, it's a good place to be the global leader in water, in hygiene and infection prevention and we've been working at it and perfecting our offering in our company for now 99 years, we'll be crossing the 100 years in 2023, next year. So a big deal for us. When we think about the impact that we have because it's nice to talk about what we do, it's even more important to talk about the impact, what we are touching every single day around the world. Well, we help produce over 1/3 of the world's food production, we impact almost 1/3 of the world's population and almost 1/4 of the power that's being generated as well around the world. So when you think about hands, we've learned it a little bit the painful way over the past few years while we've helped sanitize over 60 billion hands last year in '21, helped feed 1.5 billion people out there. And most importantly, helped save enough water for the drinking needs of over 700 million people, which is on our path to reach our objective by 2030 to help save enough water for 1 billion people out there, which leads as well to huge energy consumption reduction because one of the facts that's not so much known is ultimately that water is the main driver of energy. So if you reduce water consumption, you reduce as well your energy footprint, your cost and your carbon footprint as well at the same time. So helping 3 million customers around the world reach those objectives in a way that help them, at the same time, get their cost as well better under control, which is one of the key reasons why we've been growing fast as well as a company because the more we help our customers produce more with a lower environmental footprint and a lower cost the more they want to have us help them in more plants, in more units around the world, which is this good cycle that we have as a company and as a business model, that the more you invest in what we do for customers, the better off you are, not only in terms of products, but in terms of cost, and in terms of environmental footprint, which helps us be resilient as well. So during kind of normal crisis, if I may say, like the financial crisis in '08, '09 or the Euro crisis that we've gone through as well, it feels like very far away for most of us as well. And still, so the earnings growth of the companies have been quite steady, to say the least, over the last 10, 15, 20 years, whatever you want to count, obviously in here, with one exception, the last 2, 3 years. So with COVID, and especially saw with big inflation because we chose so. During COVID, in 2020, 20% of our business is focused on hotels and restaurants, which is a good thing most of the time, except in COVID when most of the hotels and restaurants closed during that time as well, we made the decision to keep our whole team intact, which is in that business over 10,000 people. And when many decided to reduce their team, we decided to keep our team because we could keep the customer relationship, we could keep the expertise of that team as well and being ready, then afterwards to leverage all that strength after COVID is behind us. On inflation, which is a very different situation, and I'll come back to that as well. When we do pricing in our company, we do pricing that sticks forever, which means that we do not go back in pricing as well. So we've gone through pricing exercises with our customers in ways that we are right for them because it was built on value that we're creating for them as well over time that we can keep it as we go forward at the same time. So when I look at 2022, I like the fundamentals that we have as a company, which is the most important part. This is what we can control. We can't control the external environment, but we can control how much new business we're generating, how much innovation we are creating, how much productivity we're improving in the company, how strong our team is becoming, how diverse our team is becoming as well because that's going to be the engine, not just for now, for the future as well. And if I look at the external environment we had to face like everyone else, obviously, a big inflation, which was over $1 billion over the last 15 months since it started in Q2 of last year as well, and making sure we could get ahead dollar-for-dollar of that curve. And also mitigating the impact of FX, which is becoming a new friend as well out there that we all have that we need to mitigate as well through productivity, not just through pricing, which is one of the main reasons why in Q3, we managed as well to have our operating [indiscernible] get back to growth, which was an important one as well. Because if you look at that chart, which is basically showing our pricing, it's in blue, and inflation being in gray or in dark on that chart in here. You can see two things that are quite important. The first one is that we do pricing every single year. And the second one is it never goes down. But most importantly, it's when we look at 2021, 2022, this year, obviously, that we've delivered 10x the pricing that we usually deliver as well, making sure we stay ahead of the cost inflation and again, that we can stay ahead with the pricing that's going to stick as well so going forward. So when I look at the results we had in the third quarter. I like the fact that we had strong organic growth of 13%. We had our pricing that went up to 12% versus 9% in the second quarter as well. We showed an easing in our gross margin pressure as well, which is an important indicator. And with the productivity that we've improved, as mentioned before, we helped our operating income turn positive as well, which is obviously a good indicator for what's to come, in the quarters to come as well. When I look at Europe, we wanted to be very straightforward in saying, well, the winter might be a bit tougher than we would hope, obviously, over there from a demand perspective because of the war, but also from a global cost of energy as well, which is impacted, obviously, by the war, but not only that we need to mitigate, which is one of the reasons we wanted to get ready and make sure that we would have enough momentum in order to get through that in Europe and get this well enough productivity to mitigate whatever will happen. So from a cost perspective as well. And at the same time, since demand might get softer, while moving to offense for us from the pricing work, which has delivered great results towards new business even faster than we've had so far. Well, it's a great way not only to mitigate what could happen in the world, but to gain share as well, which is the most important part of our company as well. At the same time, it's important to keep in mind as well, if you look at that chart, so it's 8 quarters, '21 and '22. The blue bars are our organic operating income in dollars. And the gray bar is inflation. What you see here is that basically our operating income has remained reasonably similar to the previous year, with a headwind that was 70% of our operating income. So it's ultimately being able to protect our income while mitigating as well, at the same time, a huge pressure from an inflation perspective. But what's most important in here since pricing is going to stick, as it always does in our model as you could see the last 20 years, well, that's going to generate earnings power as well going forward. Whenever that's going to happen, inflation is going to ease and go down as well, which is when we generate this important margin leverages as we always do as a model and as a company as well. So that's going to come whenever inflation is going to go down, which is why I firmly believe that we're going to get back to our 6% to 8% organic growth type of performance. 15% EPS growth as well. But most importantly is on the margin side as well, we were 16% in 2019, 14% in '21. We will get back to where we were in '19, as we always do on our path to get to the 20%. Think about how much earnings power that's generating as a model as we've delivered all the time. So that was for the short term or the midterm, whatever you want to define. So what's to come in the next few quarters. I'd like to spend some time for the ones knowing us a little bit less about the opportunity, the future and how we capture as well that opportunity, no matter what's happening around the world as well. The first one is, we're going to be 2 billion more people by 2050. That's a 1/3 more versus what we are today. It's all great news, obviously. At the same time, we will need more water. As you can see here, we'll need over 50% more water than what we use today by 2030. That's 8 years down the road. It was estimated to be 40% 3 years ago. So that's going exponentially higher, which is an issue because we're not going to have more water than what's on earth, obviously, right now. We'll need more food, we'll need more energy. Those are challenges that all companies will have to deal with and countries as well around the world. This is what we do. It's to help customers everywhere around the world, 3 million of them help address those issues, while reducing the total cost of operation. So it's not at a green premium. For us, it's at the green benefit. You can produce more products, better products, while reducing your impact and reducing your cost as well at the same time. So the trends are really sought in our favor. I love those trends that we've been on. So for a very long time as a company. And second, we're clearly the leader in what we do. But at the same time, we have 10% of $150 billion market as well out there. And if we look at our competition or like-for-like in the businesses that we are in, we're far ahead, which is a good news as well. So we're the leader at the same time of a big market, growing market, where we have 90% of the share out there that we still need to get and we keep building that pie as well by adding new industries, by adding new solutions as well, making sure that the pie gets bigger and not just our share, which is secondary for us. We serve most of the global companies around the world. This is just a small snapshot, obviously, of all the customers that we serve, it's roughly 80% of the Fortune 500 work with us today, and we keep customers for life, which is really important for us. It's not just a won and done. It's really with many of those global companies, we've been working for 10 years, 20 years with the plan to work the next decades as well together. But keeping in mind that none of them is more than 2% of our total sales as well. So we don't have a big risk as well even though we have no intention of losing any of those customers, especially in difficult times like what they're going through as well right now. And the last point is also that if we look at this $152 billion market, well half of that opportunity is an opportunity with customers that we already have a relationship with. We might be selling them a pest elimination service, but we're not selling a water service as well or you're in a hospital and you serve the kitchen, but you're not serving the operating room, you're not serving the water, you're not serving the air, you're not serving pest elimination. That's all what we call Circle the Customer, and Circle the Globe is the second dimension, is making sure that you get every single restaurant of McDonald's around the world or every plant of Ford Motor Company around the world as well, making sure that we can really penetrate our customers with all our solutions everywhere around the world. And then you have all the customers with whom we don't have a relationship yet, which is all open space, obviously, so for us. So really good trends, good leadership position and in a way that we can keep driving penetration in a way that's growing as well our company. So talking about how we grow. Well, first, we serve 40 different industries out there from restaurants to hotels, to hospitals, to pharma, to power generation, car manufacturing, microelectronics, you name it. But at the same time, it's always the same model. It's the same platforms. It's not the same people. Those are experts for every end market, making sure that the hospital expert is not the same as the one dealing with a hotel or a power plant, obviously, they are dedicated by end market, so very clearly as well. At the same time, we innovate together. Whatever we can develop from our downstream business, we can use it elsewhere in our industrial business as well. So we share R&D in great ways. It's 1 R&D organization that's developing for 40 end markets, which is one of the reasons why we can leverage the work that we do in R&D in ways that we invest a lot, but at the same time, it's small in total versus our sales for the whole company. And most importantly, 90% of our sales are recurring. This means that you pay us with the product that you're buying so from us and you get the service, you get the technology, you get everything. That's part of it as well. We have enterprise technologies that we share around those businesses and around the world as well, chemistry. We have big platforms of antimicrobials, which is disinfectants. This is true for industrial applications in pharma, like in a restaurant as well, making sure that vegetables are not risky as well at the same time, it's the same R&D that's developing for both as well so we can share that knowledge and expertise. Our technology as well, dispensing, at the same time, while it can be used from one industry to the other. And last but not least, it's digital technology. ECOLAB3D is one of the largest industrial IoT cloud that exists out there. We started 5, 6 years ago with the cloud. We started with digital technology 30 years ago, early '90s as well by connecting our water systems in real time, anywhere around the world. And today, we have over 40,000 plants that are remote monitored from a center based in India that we know exactly how performance is going. And we can learn across those different industries as well, what works well, what's best in class, what are the best practices in order to make sure that within a company all performing at the same level, plant-to-plant or hotel-by-hotel and across industries as well, which is very unique that we have in our company. And last but not least, our value proposition is the same. And you've heard it a few times now. It's really helping our customers deliver better outcomes. It can be guest satisfaction in a hotel. It can be making sure that you don't get sick in a hotel. It can make sure that the hotel does it in a way that's environmental friendly. This is better outcome. While for the customer, it's reducing their impact on the environment, the usage of natural resources and the cost that's related to it. This is true in health care. This is true in downstream. This is true in car manufacturing, whatever is the industry we serve. The solutions are different, but the promise is the same: you produce better products at a lower cost because you use less natural resources. And the cool thing is that the spend or investments that customers do with us is a fraction of their total cost. It's usually less than 5% versus everything else that they're spending for their total operating cost. So it's less than 5% that's impacting 95% or 100% of the operations for customers, which is one of the reasons why pricing is such a good story in our company. If I just take one example, which is a new industry, so for us, data centers, it's a booming industry because of all we're using. So with social media, with computers, with whatever, is data-related. Well, there are hundreds around the world, and it's growing double-digit every day -- every year. Well, those data centers use a huge amount of water. One data center is roughly the equivalent of 80 hospitals in terms of how much water they're using. They're creating a lot of waste as well at the same time. Well, that's a challenge. And those high-tech companies are working with us in order to make sure that they can not only guarantee 99.999% of uptime that computers always work but that they can reduce energy consumption, water consumption, water -- waste usage -- or impact while reducing their total cost as well at the same time. And as you can see here, you get the 60% return in 1 average data center by using the overall program that we deliver for them. And most of those companies have made commitments to get to net-zero water and carbon. Those are the programs we develop with them and execute with them at the same time and every year help them as well get the return that they're looking for at the same time. And last but not least, well we help our customers when they need us the most. Today, hard sometimes to get the security of supply that they all need. Think about Europe right now as well. We've absolutely made a commitment in the last few years that for all our customers anywhere around the world, they will get the service that they deserve. Because if we don't provide the service that they want, well, they will stop operating, this is an important part of the operations. None has stopped over the last few years, which is why the security of supply is so essential as well so for us. While they need reduced cost of operation, thinking about inflation so today and maybe some softening of demand in some industries as well, having a partner that helps them reduce their cost of operation is a good deal during recessionary times as well, whatever is going to happen in the quarters to come as well. Reducing energy, well in Europe, many of our customers, well, they love what we're doing. Obviously, for them because there's not enough out there. Hopefully, things are going to continue on a good path that it is. Right now, who knows how the next few months are going to be and at the same time, making sure that they can stay on their track as well of delivering on their sustainability commitment, which brings me to one last element, which is why we are a sustainability leader, why we've been working on that for so many years as well and that ultimately, we help customers get to their environmental commitment. It starts with what we do, our own operations, our own manufacturing, our own supply chain, our own team, which is large, almost 50,000 people, over 100 plants as well around the world and making sure that we get towards our net-zero commitment. And every single year, as you will see so, we've delivered as well against that. But most importantly, which is 100x more than what we do in our own operations, it's to help our customers get to their objective as well at the same time, which is why we're often seen as the world's sustainability company because we've been doing that for many, many years for customers around the world. So two things, what we measure: first is progress on our own commitments on water, on climate and diversity, equity and inclusion and on safety. And as you can see here, so versus our target in 2021, we've met or overreached each of them, which has been true for many, many years, and we'll continue on that path as well towards our 2030 goals and going beyond, obviously, as well. And second, it's really on our commitments of delivering our customers' commitment, when we roll them up and we know in real time where we are, you can see that on our website on your mobile phone as well, how much water we've helped save minute-by-minute in real time because it's connected. So we know exactly how much that is as well. Well, as you can see on our path to get 300 million gallons of water saved by 2030, which is this equivalent of 1 billion people drinking needs as well by then. While in 2021, we were over our target as well, and that's been true on climate, which is CO2 emissions, which is true as well on how many meals we've helped as well protect and same on the food side as well. Which leads me so to the end. We have a strong financial position, and we are protecting it every single day in good -- like in less good times as well with a clear long-term ambition to really stay on this 6% to 8% organic growth path, getting to 20% of OI margin, which is a commitment we've made years back as well. We stay on that path as well, and delivering the double-digit EPS growth. Free cash flow conversion as well. We've done that year in and year out. That's not going to change anytime soon to be over 90% of cash conversion versus net income as well. Leverage to get back to 2x, we are 3x-plus right now, made an important acquisition in December. So we're north of 3x, and we'll get back to 2x in the foreseeable future as well, which has always been the cycle we go through as well as a company. And from a capital allocation perspective as well, sticking to our objective of really focusing first in dividend second on M&A, and third, on buyback as well. And we've been very consistent following those priorities over time, and that's not going to change as well in the future. We've been returning a lot of cash to shareholders through, obviously, both dividends and buyback as well. As you can see, so close to $10 billion over the last 10 years. And we've been increasing our dividend every single year for the last 30 years as well without missing a beat and no ambition to change that as well in the future. So in summary, we have strong fundamentals. We have great tailwinds with the trends that we're on, be it on water scarcity, climate change, infection risk. This is what we do for our customers. We serve a huge market, $150 billion. We're in a place where we have the means of our ambitions as well. And times are not always easy. I've never been so more bullish about where we're going as a company because the fundamentals of the company are really strong, keep getting stronger and our tailwinds as well at the same time. So always a pleasure to share with you our story, and we can take a few minutes to get the few questions in.

Yes. We have about 4 minutes left here in the session. If you have a question, you can raise your hand here, plus I've got a couple prepared as well. Anybody want to go first? One of the things you announced in your quarter, Christophe, was -- look at Europe, obviously, the markets there are more challenging, even the raw material inputs are a little bit more challenging than they are in North America. I was wondering if you could just give us a little bit more detail as to what some of your plans are to address your efficiency of operations there and how that will change the operations and impact for -- enhance the customer experience?

In Europe, you mean?

Yes.

Yes. So looking at Europe, so what's happening on the eastern front with the impact on global energy cost as well. We said, well, how bad could it turn over there as a just working assumption, and we'll see who is right, obviously. And we said, well, what do we need to do in order to protect our business, protect our performance, protect our service to our customers in an environment that could get more difficult over there. And most importantly, it's to make sure that everything we will do in the months to come is something we would have planned to do in the years to come, no matter what. We have a great business over there, growing nicely, highly profitable. We want to keep to stay on that path. So what we're doing over there, we're streamlining our supply network plants, regrouping where it makes sense, having the right plants at the right place as well. It's an important one. It's leveraging digital technology as well, making sure that we can become more efficient with our field sales force as well that we don't need to be all the time to our customers when you can have a remote monitoring 24/7. So you have a higher value. And when our team is going there, well, it's to create even more value at the same time, and it's to leverage as well all the work and investments we've made in ERP, SAP, that we can really create this one global company in Europe that we always wanted to get to, but even quicker.

Great. Any other questions here? There are no other questions here. You can join us also in Salon A, the breakout session, which we'll head to right after the session is over. Going once, twice? Thanks, Christophe.

Thank you so much. Thank you, Andy.