Ecolab Inc. (ECL) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. We'll kick start here on time. Thank you, everyone, for joining us. My name is Manav Patnaik. I'm Barclays' business and information services analyst. We're very happy to kick off our afternoon session here with Christophe Beck, who is the CEO of Ecolab. So Christophe, thank you for being here. Christophe is going to do a presentation. And then once he's done, I'll come back up and run through a few questions, but we'll open up to the audience as well with any follow-ups or questions that you have. So Christophe, over to you.

Thank you so much. Thank you, Manav. Thanks for everyone for being here. Sunny London. That's unusual, but we love it. We'll take it, obviously, when it comes. And always a pleasure to share with you the growth story of our company, where we came from, but most importantly, where we're going. So a few things. Obviously, before I get started, you're familiar with the cautionary statement, especially when we talk about the future. Currently, I need to move on the right for the camera in the back there. So I'll do that, trying to not get too many in the chairs in here. Are you good with that in the back? Well, good. Perfect. We made it. Love it. So now that we've talked about the cautionary statements. So what we truly like in our company. First, what we do, and I'll share a little bit more with you what's the company all about. But in substance, we're the global leader in hygiene, in water and in infection prevention. We have a strategy that we practiced for 100 years. We started the campaign in 1923, so it's been quite a while, to say the least. And it's a strategy that works, as you will see, which we call circle the customer, circle the globe, which is, honestly, trying to improve the performance in one unit and to do the same everywhere around the world, whatever industry we might be serving as well. We're coming out of an inflationary environment, obviously, where our margin has been a big topic for all of us and especially for our company as well, which we see, as always, as an opportunity to improve our margins further, which is a good thing in a growth company where you see that you can grow and, at the same time, you can get better margin coming out of it as well in order to get to our longer-term performance objective that we've talked about for 20, 30 years. And they haven't changed, by the way, as you will see along the presentation. So a pretty cool story. And what we do, our purpose is to protect what's vital. It starts by protecting people from infections. That's been a pretty big topic over the past few years, but it's not just related to COVID. It can be from any infection that you could have, especially from what you might be eating as well. That's what we call food safety. But it can be public health as well in a public environment, making sure that you don't get sick. It can be animal health, as well making sure that the whole food chain starts as well in a healthy way. So that's the whole protecting people. And the second part of our purpose is protecting the resources vital to life, especially on water, and making sure that our customer can produce better products, more products in a way that's using as little water as necessary and, ideally, to get to net zero like many companies have been promising as well. And last but not least, it's to protect business. Because many talk about the green premium, talking about the fact that in order to be sustainable, it comes at a cost, you need to make an investment. This is not our thesis. Not saying that others need to look at it differently when you invest behind new technologies. In our case, it's helping customers deliver on their ESG promise in a way that helped the P&L along the way as well at the same time. So really protecting what's vital, people, planet and businesses, at the core of what we do. In order to meet those critical needs of our customers, the planet and people, we have unique capabilities. We have 47,000 people in our company, half of them are serving roughly 1 million customers around the world in 170 countries, serving 40 different industries. We have over 1,200 scientists in various places around the world focused on infection prevention, on water and on hygiene, which are the 3 big pillars of our company. And we have a growing number in digital with over 1,000 people today. We started that journey 30 years ago. So it's not a new fashion for us, but it's something that is really gaining speed over the last few years. And when we talk about reach, well, we are touching a lot. So when we do something, the right way for an industry, we can expand it everywhere around the world. As mentioned, we touch 1 million customer location around the world, which are all using water. So helping them use less water has a big impact on water usage, water scarcity and the impact on the environment. We touch 1/3 of the world food production, almost 1/4 of the world's power that's being produced as well around the world. Power, metals, energy, electricity. And we touch 1.4 billion people preventing infections as well, so for all of them. So when you combine capabilities and the reach of the company to address those critical needs, well, there's a lot of good things that can happen, especially when you do it in a way which is good for the customer's P&L, which drives good things for us as well at the same time. And we help protect 80% of the large brands as well out there in three major groups. One is what we call institutionals. Those are the hotels and the restaurants everywhere around the world, making sure they have the same standards, deliver the same way anywhere you are around the world. In our industrial business, which is mostly our water business, mostly industrial companies. And in health care and life sciences, which in our vernacular, it's mostly the pharma industries that we serve while we serve hospitals as well. But clearly, in that order. We have a business that's pretty balanced both in terms of end markets and in geographies as well. We like that a lot. It came out of the customer expansion because we are working with customers wherever they work around the world. So when we start with a new customer, we go anywhere around the world where they are. That helps us, obviously, create the footprint in each of those industries anywhere around the world. That helps the geographic balance and, at the same time, our end market balance as well as you can see. So half of the company is in industrial. And again for us, that's our water business. The way we call it. The third is institutions, specialty. Those are restaurants and hotels, and as you can see, health care and life science for the balance as well. And it's important to keep in mind, we sell razorblades. We install razors, and we sell razorblades. The consumable revenue 90-plus percent of what we sell and the balance of it are the products that are distributing, obviously. So those consumables is razor/razorblade model that we've been practicing for now over 100 years as a company. We've had a long history of growth for many, many years. Looking at 5 years, 10 years, 15 years, 20 years, whatever, is the scope that you want to use. It's always delivering this double-digit EPS growth, which is something that we want to stick to long term. Keeping that in mind, it's been underlying the truth for the last 3 years as well. At the same time, we decided to make investments for our people, for our customers and for our company in the meantime that had an impact on earnings. And I want to be clear as well on that for the ones who didn't follow us in 2020. For instance, we decided to keep all our team during that time when restaurants and hotels were kind of closing everywhere around the world. We said we'd keep our 10,000 people that are serving those customers because it's expertise, it's relationship, it's capabilities that we are really happy we kept as well. We've been serving as well our customers during the whole shortages in '21 as well, because when we don't serve a customer being a restaurant, a nuclear plant, a steel mill, whatever, they stop operating. So that came at the cost as well. And then inflation, which was something that we wanted to help our customers absorb in a way that they could do it well and that we could keep pricing as well for the long term, and I'll come back to that as well. If you think just 2022, that's been an interesting year. So for us, 2021 was a good growth versus 2020. In 2022, we lost almost all our earnings to inflation and rebuilt 96% of it within the same years that was triggered by the war in February '22 as we're all familiar with as well. But it's showing how the company can react to external events so very quickly in quite a massive way as well. We've driven very nice growth as well over the last few quarters, which is a combination of volume and price, obviously. And talking about price, it's interesting in our model where price never goes down. It's always a positive story. It's been a year after year. You can see on that chart that the gray is inflation and the blue is the pricing. It's always a positive story. And when it needs to get much higher, well, it gets much higher as well. And always driven, and that takes a bit more time by the value we create for our customers. It's the savings we help them generate in their operations that generates our share, that drives pricing, that drives growth as well. So for the future, which is what we call eROI, which is basically how much savings do I create for the customer versus the investment that they're making. And we promise at least, 25% return. Productivity has been a good story as well, SG&A, so for many, many years, and that's going to keep continuing. You're not going to get to zero, obviously. But digital technology, which is a big capability of the company, is used not only for our customers but is used for our own field operations as well to make sure that they are as efficient as they can be as well. And that's why that's a journey that we believe is going to continue for the years to come as well. And that's driven strong earnings momentum. If you look at the operating income of the last few quarters, Q2 last year was, obviously, the postwar start story in early 2022. And building up operating income, so 10% last Q4 quarter of 2022 and a 19% in Q1, driving good EPS as well on the right is the difference between FX and interest, which is a story that we all face, obviously. But really showing where we're heading towards a double-digit EPS growth that we've set by the end of the year. That's where we're going to be as well, which is why I believe that's the objective that we've set years back of 6% to 8% top line growth, 20% OI margin and 15% EPS growth are probably more true than they've ever been since we launched those targets 30 years ago as a campaign. So getting a little bit more in details on why we're growing and how we're growing, I'd like to start by the needs that we are serving. Starting with public health. Well, we'll be 30% more people by 2050, that 3 billion more people out there. We will need more food for that. Interestingly enough, we'll need 56% more food, which is much higher than the 30%, because there's this move from cereal-based diet to protein-based animals. And you need to feed the animals before the animals can be used, obviously, so in the food chain that requires way more protein to be produced in order to get there. That's a big number, and that's by 2050 as well. By 2030, by the way, today, the world is more or less using as much water as nature can replenish. We're kind of ahead of it, where the supply is lower than demand. Last time that it was balanced was 2005, roughly. It's expected that by 2030, we'll need 56% more water than what nature can replenish. That's going to happen, obviously, so we need to reuse and recycle water in order to be able to produce that as well going forward. And we'll need almost 50% more energy because of more people, a world that's growing and diets that are changing as well at the same time. Those are the big trends that are -- that have been driving our growth as a company for the years past and that are going to be accelerating as well the demand for what we do going forward. In terms of position, we've been working really hard to make the pie that we serve as big as it can be and to grow the pie by adding new markets to it. One example is data centers. It's an industry that didn't really exist a few years back. We're all familiar with cloud technology that requires always more data, always more data centers that are requiring a huge amount of water and energy, by the way. Well, that's a new end market for us that added to our end markets, which are today 152 billion. And we have 9% share of that market. And compared to competition as well, there's no one that's exactly the same out there. We have competitor in all of the end markets that we serve. So we have many competitors. That's what you see on the charts, with blue being Ecolab and the gray being all the other competitors adding together compared to who we are in those end markets as well. And how we drive value? Our promise has always been the same. It's to help our customers produce more products, better products at a lower total cost because they reduce the impact on the environment. Less water, less energy, less waste, equally less cost. And how do we do that? We have on-site expertise. Each of the end markets that we serve has dedicated experts, experts in power generation, experts in pharma, experts in hotels, experts in restaurants and so on. So those are people visiting those locations. Understanding from A to Z how they operate, bringing technology, data and expertise in order to help the restaurants operate better, the power plants to operate better and to deliver better outcomes at a lower cost because they use less natural resources. Interestingly enough, you might, so for the end markets, is that a complex story? To a certain extent, it is. But we simplified doing two things. The first one is each of our end markets is run by one person, which means that it's simple within that end market with clear expertise behind it. And the second one is that we share a lot of technology. Across all those end markets, chemistry. There's a lot that we can leverage between health care and refining and steelmaking and power generation. We leverage as well all our engineering capabilities as well on how to reuse water, how to protect from the risk of infection, and our digital technology is the same. Ultimately, we have one cloud, the ECOLAB3D that you will see as well in a second, where everything is connected to that cloud as well. That's shared across all the markets that we have. Talking about the digital technology. We started in 1991, which was before the worldwide web by the way, so that was done a little bit differently. It was to connect chemistry. We had the concept of connected chemistry, which we call connected water today, which is in real time, you can understand how is your process working? What's the quality of the water? What does it need in order to come back to its original state that you can reuse it as well? And all those systems are connected to the ECOLAB3D cloud, which means that, ultimately, we know what's the best restaurant on the planet. We know what's the best power plant on the planet. We know how to operate them in the best way as well. And we can share along the way that expertise. So across our teams, across one company, across an industry, across industries as well, which is a very unique place to be because we have that knowledge on what good looks like and how to get there as well at the same time. And last but not least, this eROI concept is something that has been developed during the years, which has been a very interesting journey, which is not just to say how much do I save and how much did I invest, and I need to have a return of at least 25%. I want to know as well in terms of the 3 pillars that are creating this total value delivered. Well, how much are my products being improved? How safer is my milk? How much longer can I hold it as well in my fridge? That's obviously having an impact on cost. My operational drivers, what's the productivity do I have in my plant? How quickly can I do my cleaning? How quickly can I change from one product to another? And last but not least, it's the environmental impact. Helping our customers tell them how much water they save, how much energy, how much waste? And you add that to the cost as well, which is what we call this total value delivered that we divide by the investment. And you get the eROI, which is the return that we're promising as well. Our growth strategy. Interestingly enough, this $152 billion market, well, we have $14 billion of our annual sales. That's 9% of it. As you can see, the rest of the $150 billion split roughly in two. Half is business that we could do with customers we already have today. We sell them something and we could sell much more of what we do. And then you have the totally new customers that haven't discovered that we even exist up to now. But as you can see, we can multiply by 4, the size of the company by selling everything we can offer to our current customers that we have today, which is why that strategy of circling the customer and circling the globe is so important. If I give you an example here. So two example, one in a food and beverage plant, it can be a meat production or can be brewery, for instance. And I'll talk about life science, pharma as well in a second. Well, in a food and beverage plant, there is a lot happening in here. How do we do that? Well, we start with an anchor technology as we call it, in a food and beverage plant is what's called cleaning in place. It's something we've developed a few years back. You don't need to dismantle the whole production line, you keep it as it is. But you just let flow within the production line, all the chemistry that's required in order to clean it, to sanitize it, to dry it and to do it in a very efficient way. This is how we start. We get into the plant with that first technology. And once we're in there, we connect it to the cloud, and we add all the rest of the technology, which is water services. It can be hygiene, food safety, lubrication. It can be pest elimination, all the things that we do in order to ensure that the products are safe, that the quality gets better and that our customers can reduce their cost because they reduce the usage of natural resources. But we always start with a good technology that we connect and then add all the services around it. And it's pretty good to see the results that those customers are getting. So taking that example, we usually do not put names for our customers that we serve. That's up to them to talk about it, obviously. You can see in that case, how much greenhouse gas has been reduced, how much gallons as well, how much energy, productivity and that plant has got $1.2 million of savings and got an eROI over 50%, which means you got in 2 years your money back of what's been done. Let's take the biopharma production as well as think about bioprocessing, the new pharma to say. Well, we start the same way. It's how do we add this anchor technology of cleaning the manufacturing site, then making sure that the clean room is sanitized and sterile as well. We add technology, like our latest technology to purify the drug as well to it. We add water technology, we add all the other services that we can to make sure that, that plant is fully operational in a way that's as effective as it can be. And then we do it everywhere around the world. And in that example, for instance, it's been big deal of $16 million savings as well, which is also driven by productivity, by water, by energy. And as you can see, the returns are good, which is why we can drive the pricing we've been driving. It's because it's backed by value that we create for our customers and we take a share of it, we translate it into pricing, which is why that pricing is sticking as well down the road. Let me conclude on two things. The first one is all we do positions us as the world's sustainability company. Most companies are coming to us when they have a hard time, which is most of them, unfortunately, to deliver on their commitments on where they want to be by '25, where do they want to be by 2030. Whatever the date that they've picked up there and said, "Help us." Understand what's the gap, where are we today, how to get there, what do I need to get done to get there, and let's look at that. So on a monthly basis as well how it's getting there. So for us, when we think about sustainability, it's first and foremost, helping our customers get to their objective. But at the same time it is making sure that within our own operations. Obviously, we are best-in-class, and we've been part of many of those standards definitions as well out there and glad to be recognized as well as such by the ones where we've defined the standards as well together with them. But interestingly enough, when you look at water and energy, many companies, you can see on that chart. So how many companies have been disclosing in the carbon disclosure project their footprint of carbon. You can see so, 38% of the last year-on-year growth, you look at the blue line is the disclosure on water. And interestingly enough, in a plant between 20% and 80% of the energy that's being used is used to manage water. To heat water, to cool water, to treat water, to pump water, you name it ultimately. So when you reduce and reuse water, you reduce as well your carbon footprint. So that shows how much the water needs is going to go up and it's the first issue that's going to happen when you get the drought. Obviously, you feel it even more than when you get too much carbon around you as we know. So for us, it's been absolutely essential that from an ESG perspective, we deliver on our promise, year in and year out. And we've done that for years. It's not a new thing. This is our view for our customer impact. If I just give you the example on water, we've made a commitment that we will help save 300 billion gallons of water with our customers. That's the drinking need equivalent of 1 billion people. So it's quite a major thing. And you can see in climate, in food and in health as well. And as you can see, we're ahead of our targets towards 2030, year in and year out as well. At the same time, we do it through our own operations as well, that we reduce water consumption, carbon as well. That we drive diversity and inclusion as well within our company as one of our big pillar in ESG. We've made remarkable progress in the last 10 years as well. And last but not least, safety, which is very embedded in everything we do as a company where we've made very good progress as well to save our own people's lives when they're serving our customers in sometimes, difficult conditions, to say the least. Let me close on our financial objective. I've mentioned that early on, they haven't changed and will not change in terms of where do we want to go. Sales, 6% to 8% organic. OI margin getting closer to this 20% margin. I think, we're going to get there sooner than what we had expected, and EPS growth of 15%. That's been true for 30 years, and it's not going to change anytime soon. Getting a free cash flow conversion, 90%-plus. We're usually in this mid-90s number as well, sometimes over 100, sometimes a bit lower. But our objective is to be north of 90% to get to a debt-to-EBITDA ratio of 2, that's always depending on M&A. Obviously, that we're doing, but we've done that so many times that we know the practice that we get back to these two. And making absolutely sure that our capital allocation priorities are clear. It's first, dividend; second, business; and third, buyback and always in that order. Which leads me to the cash returns that we, shareholders, roughly $10 billion in the last 10-ish years with dividend that's been growing, so for 31 years now. And you can see share repurchase as well as something that we've done every year as well, but as a third priority of our capital allocation, as I've shared just before. So last but not least, we like where we are, the leadership positions that we have. We know that what we do matters for our customers and the communities around them. And especially when we can do that in a way that helps them make more money. We like the strategy we have as well: circle the customers, circle the globe I've shared with you, in one plant or one restaurant and done that around the world. Margin is something that has always been a point of focus. So for us, it's not a straight line to heaven. But times like that, all times for us where we can expand our margins are as hot as it is. We like those times as well. And last but not least, we like a longer-term financial objectives as well, which have remained the same for a very long time as well at the same time. So a good story and the best is to come. So it's that. Manav, let's open it to Q&A.

Yes. Thank you, Christophe. So just a few questions here. So the first one, and we've talked about this before. The value proposition of your business is clear. the TAM slide, the TAM only gets bigger every time you put up that slide and it's a pretty fragmented market. So the question is, with all that opportunity, I think your sales force only grows around low single digits a year. Why not grow faster? Why not take advantage of what's real right in front of you?

It's kind of a good problem to have too much opportunity in front of us and having to answer the question that you're talking about. How can we capture more quicker. The biggest challenge that we have is that there's a lot of work that needs to get done in order to make that work. When we need to sign certified restaurants around the world, well, we need to have a few thousand people having to do the work as well. When you need to transform a brewery from using a lot of water to get to net zero, there's a lot of technology that needs to be brought in. There's a lot of engineering, there's a lot of capabilities that needs to be brought in. That takes time. So we're trying to find the right balance on how much we invest in people serving those customers and done that in a way that returns as much money as we can as well at the same time. So we're trying to optimize that, but it comes with a certain time as well.

Got it. And I think, historically, there's an additional low single digit of productivity that you had on your sales force growth. But you talked a lot about data, data collection, AI. Can you give us some perspective on how you can probably use that to maybe have the productivity piece go up even more?

Yes, love to. So when you think about it for today, our teams need to go to the plants, go to the restaurant. They need to get prepared for it, bring all we do for them, from all the different divisions serving that customer and having a clear view and presenting it to the customer as well. They need to go there in order to make sure that our equipment, our technology is operating the right way. Well, that's done by human beings or was done by human beings in the past. This is something that can be done by the machine tomorrow. Going to a customer, well, this is -- if you truly need to, you can remote monitor that as well. We do that for 40,000 plants around the world, nuclear plants, airports, paper mills, you name it, out there. You can prepare us well all the visits by our customers because you have everything real time on your phone, on that location and how does it compare to other locations as well, which is what's driving the productivity of our sales force in quite dramatic ways.

Got it. And I think so far, there's been a lot of data points, I guess, that help your sales force do productively. Like when can that become a pricing or revenue opportunity with your customers?

It's a great question, because applying all that technology so -- I won't say for -- okay, it's driving the productivity, as we talked about. But the fact that we know when we talked about those breweries, what's the best brewery out there? And when I'm saying we know, it's too much knowledge, expertise and communities that are in our people's heads today. It's that person serving that brewery in Indonesia that knows best. Well, we should be in a place where we now what's the best brewery in the planet, what's the best performance, how do you get there, and who do you need to talk to in to get it. That's the whole idea of ECOLAB3D. But ultimately, we can tell a customer, "Well, if your best brewery would be at the industry standard, then you would do that in the 150 breweries you have out there, you could save $200 million." Well, what's the plan? What's our share? How does it get into pricing? That's the next chapter for us.

Got it. Before we get to pricing rolls and in this year's guidance, for example. Just to step back a bit, Doug handed over the reins to you at a great time, I guess. But just when you go back, there's been a lot of challenges over the last 3 years that you've navigated very well. But just curious if there would be anything in hindsight that you would do differently or position Ecolab differently in terms of all this future opportunity that you talked about?

Yes, it's a good question. It's not -- I've been part of the journey so before the transition, so 3 years ago now. So there's nothing I can really look back and say, "Okay, who the hell did that?" I was part, obviously, of the whole journey. And I'm quite proud of what the team has done during that time. I think the 2 things that come to mind, the first one is our digital capabilities are unbelievable. And how do we leveraged those capabilities even faster and broader across industries and around the world? Every one of our customers are having a hard time to find people today, we know that. So unemployment is very low, which is kind of a good news and a challenge for many of those customers not finding the folks to work in their plants. Well, automation that we can provide can help them operate with less people. Well, that's good news for them. It's good news for us because we sell all that. So that's for sure one. And the second one, when I think back, the hotel and restaurant industry has been shifting in terms of how guests are interacting with that industry over the last many years, but that has accelerated during COVID, where 1/3 of people going to a restaurant today. Well, do not sit in the restaurant. They pick up the food or they get it delivered, that's changing the way we deal with customers in quite big ways. That's true in hotels as well, where you have higher price for your rooms and you need to do your own bed. That's a great thing for our customers. But ultimately, we need to think a bit differently how can we help our hotel customers provide the same level of service or even better at the cost that they have today where they're providing much less. So it's kind of adapting to new market conditions. We're getting to the right place. We could have done that even earlier.

Got it. And then just moving to this year's guidance and kind of outlook. From a macro perspective, I think you said first quarter was ahead of plan, but you guys still maintain kind of the full year outlook. And it was because you had just -- you wanted to wait and see what's happening on the macro level. So could you just give us -- elaborate on that a bit more in terms of what are you seeing in your end markets? And what is it that's holding you back in terms of that outlook?

So first, we haven't given a formal guidance for the year. We've practiced in the last few years this so-called sub guidance, which is not something we love, to be totally honest on that. We prefer a straight guidance, which is a range with midpoint as we've always done in the past. We do that when we're sure we're going to hit it. The last 3 years, with all the reasons that we mentioned, so COVID, shortages, inflation, you name it, the war that we all went through. I wanted to do that in steps and say, "Okay, let's do that quarter-by-quarter and making sure that in the Ecolab way, we deliver as promised or we over deliver it." We've done that for the second quarter, which is going to be a strong quarter as well with the guidance we have provided. For the full year, I haven't said it stays the same as that. Directionally, we're going to keep improving so quarter-after-quarter and will exceed the year on our traditional trajectory of low double digits EPS growth. Can be better than that. I think that Q2 will tell us a lot on what's happening in the world. I'm not totally sure what's going to happen on the Eastern European front. Hard to tell. I think the next month or so, we will know, hopefully, for the better, not totally sure about that as well. How is inflation going to look like? How is the U.S.-China relationship going to evolve as well? How is our delivered product cost inflation, the true cost that we have, that's going to impact us as well. I think at the end of Q2, we will know more. And kind of we can remove a little bit some of the unknown and say, "Yes, we feel good or even better than what we had planned for the year and the years to come."