Ecolab Inc. (ECL) Earnings Call Transcript & Summary

All right, guys. We're getting ready for the next session. Thanks for coming to Baird's Global Industrial Conference. I'm Andy Wittmann. I'm the senior facilities services analyst at Baird and delighted to be joined again this year by Ecolab. The company's Chairman and CEO, Christophe Beck is here; Andy Hedberg from Investor Relations has also joined us here today. This one is going to be conducted as a formal presentation to familiarize some of you who might not know the company as well. So Christophe is going to do that. We're going to also have a breakout session after this formal session is over. If there's a couple minutes for questions at the end, we'll take them here. But I think the breakout is probably where we'll do the majority of the questions. So with that, Christophe, please?

Thank you so much, Andy. Good morning, everyone. Good to be here. It was a pleasure to share our growth story that's been going for 100 years now and 1923 is when we started as a company. Before I get into the future, just reminding you about the cautionary statement that you know probably by heart by now as well. So 100 years of what we call, protecting what's vital, which is our purpose, and it's been our purpose for 100 years. What we mean with protecting what's vital is protecting people, people from infection. We've experienced that in extreme ways over the last few years. It's protecting the planet as well, especially the natural resources starting with water, and we've become the largest water company in the world as well, over time, and it's to protect business health because all we do here aims at improving business performance, while protecting people health and the planet health as well at the same time. So all 3 come very nicely together. We have unique capabilities that we've built over time. We have 47,000 people that are serving millions of customers around the world in 40 different industries, in 172 countries. So we have a lot of expertise serving all those customers anywhere around the world. And our reach is pretty unique. We touch 1/3 of the world's food production and almost 1/4 of the power, the electricity that's being produced as well around the world, and millions of customer locations, in how to manage the operations in a way that's protecting their customers and protecting the environment, while protecting their own future, which is one of the reasons why we serve most of the big brands out there around the world. That's true in the U.S. That's true in Europe. That's true in China. That's true anywhere around the world, and especially companies that have presence everywhere around the world. We want to have the same standard of protecting their products, their operations, their environment the same way anywhere around the world, where they come to us because they know that it's us doing it in person, anywhere around the world. We have an interesting business model as well for the ones that are a bit less familiar with us. 90% is recurring revenue. It can be chemistry, it can be services, it can be technology, it can be digital subscription, it can be projects. It's all recurring. 90% plus has been recurring for the 100 years that we've been in business. We have a good spread of our business exposure being: Industrial, so those are the plants in many different segments; Institutional and Specialty, that's the hotel and restaurants business, for the most part; and Healthcare and Life Science is the smallest business that we have, serving Healthcare, hospitals, and Life Science, serving pharma industries, which is different, and then we have a few other like Pest Elimination, which is a remarkable business for us that is part of our so-called Other segment. From a regional perspective as well, as you can see, so more than 1/2 of it is in North America; Europe, India, Middle East and Africa is our second market; and then AP, Asia Pacific and Greater China being the third one; and Latin America, smaller but extremely well performing as an organization, and that's been the case for a very long time as well. So if you look at the growth story of the company, so the last few years during interesting times, with COVID as well, so moved from $12 billion to $15 billion. In terms of organic growth as well, it's been a very good story for us, driven by volume and price. I'll come back to that, obviously, and with no intent to change the trajectory as well so going forward. From an operating income margin as well perspective, which has been always the name of the game, so for our organization as well, so it keeps going up, but it keeps as well going up in ways that are good for us, but that are good for our customers as well at the same time. So it's not taking advantage of the positions that we have around the world. It's really making sure that the pricing that we get from our customers is always related to the value we create for them, which are for us total operating cost reductions that we help them deliver in their own operation being a restaurant, a hotel, a plant, a hospital, and then I'll come back to that as well, which is why this healthy margin improvement sometimes takes time, so to get back to the right trajectory, but it stacks and it takes forever. When we think about operating income margin, we've made that commitment as well, so to get to 20% operating income in the next few years. We came from 16%, so pre-COVID. We were 12% last year. We'll be 14% this year. If you take the middle of the range for the fourth quarter, it's going to be 15% so you're close to the 16% where we used to be in 2019. And interestingly enough, to get to the 20%, most of it is to recover the gross margin that we used to have. So it's not to get a gross margin that we've never reached; it's to reach the high watermark that we used to have, and 3/4 of that is to get the mix back to where it used to be. Our Institutional business, hotel and restaurants, obviously, became smaller during the pandemic and has been growing back in the meantime. Just by getting Institutional back to where it used to be as a share of sales, you get 3 points out of the 4 from a gross margin perspective that we need to improve as well. Then it's pricing, and then its productivity as well to get us back to the 20%, which is, for me, very much focused on execution. We know what we need to get done. It's not that we need to do things we've never done. This is really so adding back bit by bit, mix, pricing, productivity, as mentioned before, to drive us to the 20% OI margin. That's driving, obviously, earnings growth. The last 3 quarters have been a very good story of earnings growth quarter-on-quarter in a world that's not exactly the simplest ever, but feel really good with where we are now and where we're going as well, given some clear indications for the fourth quarter as well, to be between 17% and 24% growth in the fourth quarter and in 2024, so to deliver a mid-teens or better type of performance in terms of adjusted EPS, which is, for me, important in order to get back to our long-term story of delivering double-digit earnings per share growth year after year, knowing that it's what we've done the last few years in terms of keeping our teams together when COVID hit, serving our customers whatever the cost during supply shortages as well, and managing inflation in a way that is good for our customers during that time. Well, it's those decisions that ultimately make me as confident as I am today about where we're going, in terms of performance because we've done the right thing for the company, for our customers and for our shareholders that are going to drive this performance that we've committed to as well going forward. Now if I look a little bit further down the road. Why I believe that we will continue the trajectory that we've had over the last 100 years as a company, well, it starts by the macro trends. We'll be 3 billion more people by 2050. We will all need more food, more energy and more water that does not exist, because the water we have on the planet, well, it's all we've got. We're not going to have more in the years to come. We will need to reuse and recycle that water forever. This is what we do as an organization. And when you reuse and recycle water, well, you reuse and recycle energy. Especially in industrial business, up to 75% of the power that's being used in a plant is used to manage water, to heat water, to cool water, to treat water, to pump water, whatever you do with water. So ultimately, reducing water consumption reduces energy consumption, which reduces cost and reduces carbon footprint, if that's your ambition as well at the same time. So the trends are really clear for us. They have been for us in the years past, they're even more in the years to come as we know that. Second, we're the leader in a pretty fragmented $152 billion market that keeps growing as well. So we don't have one company in front of us that's doing what we do with the breadth of the applications, with the regional presence we have, with all the industries that we serve, there is no one out there. It's more by industry that we have competition. So by definition, they're much smaller than we have. So with much less capabilities as well to deliver anywhere around the world, wherever you operate in your operation. Take Walmart, for instance, which is a big partner of us. Well, they have data centers. Beyond retail stores, they have food and beverage plants, they have clinics, they have warehouses. Those are all elements that we can serve for them that no one else can, if you take one customer like Walmart as well. And third, what we do is always driven by delivering performance improvement for our customers. We bring together technology, chemistry, data expertise in all the 3 million locations that we serve around the world, with the objective at the end of the day, to help our customers produce better results, whatever you produce as an industry at a lower total cost. So you get the return on the investment that you have while you protect your consumers, or your guests, whatever they're called, and natural resources as well at the same time. We have a metric on how we measure that. We call it eROI. It's 3 pillars to make it easy. It's operational improvement, you have more capacity to produce, or you have less people to produce the same thing, whatever the operational improvement that can be. That's the first one. The second is how do you improve the quality of your products. It can be the shelf life of a milk. It can be reduced hospital-acquired infections in a hospital. Whatever the outcome is that you're looking for, this is measured in dollar terms. And the third pillar are the natural resources, water, energy and waste that we reduce as well. We put all 3 together. We call them total value delivered, and we divide that by the incremental investment that customers are making in what we do, and that return needs to be north of 25%. That's the metric that we've been using for a very long time and that we keep using going forward, most of it being measured in real time through digital technology, I'm going to come back to that as well, which is allowing us to really understand how much have we delivered for the customer, how much more can we deliver as well in the years to come. We need a lot of innovation, obviously, to get there. That's not happening just by coincidence. And innovation is a big driver of our growth for us. Our innovation pipeline is the biggest it's ever been. We're shifting as well from product innovation to program innovation for instance, to get data centers that can operate at net zero water usage and getting a 99.9% uptime. This is a program innovation versus individual products that are serving that purpose. That's a big shift that we've made over the last few years that's really driving as well much better margins, which is great. I can give you here a few examples. I mentioned some of the data centers just before. But it's in the 4 key areas that you can see here: high-growth water: data centers, microelectronics, a chip in your iPhone requires 50 gallons of water to produce just 1 chip. Well, we're helping the microelectronic industry to produce more chips with much less water. You've noticed they're mostly building plants in places, in the desert in the U.S., especially, well, there is no water need, obviously, solution to produce high-quality chips, which is critical. Life Sciences as well, it's in biotechnology, bioprocessing, especially where we have some very interesting innovation coming up as well, or pharma intelligence, it's to improve the overall process of a pharma production within the plant. That's one of the new pillars as well. Intelligent operations or in institution as well, helping smaller restaurants with the right solutions in order to produce the safe outcome with a much lower cost as well, without going too much in detail as well on that. And last but not least, well, we want to become the Microsoft of a restaurant in terms of systems as well, because we have such an access in all the restaurants anywhere around the world, getting the systems, getting the data in order to improve operations with much less cost, much less labor. How do we get there? Digital is a big deal for our organization. We have ECOLAB3D, which is one of the largest industrial clouds around the world. We collect over 90 billion data points every year. It's coming -- it's growing every single year, obviously, with the number of installs we have anywhere around the world, the number of units that we serve as well. What do we do with that? Well, when we know exactly how the operations are working, we can monitor them remotely. We do that from India, and 5 other places around the world, in China and Europe, in the U.S., in the Middle East, making sure that all those plants are operating as efficiently as they can. And if there is an issue, we can solve it most of the time remotely. But at the same time, what's interesting is that we know what's the best restaurant operating performance in the world. We know how a brewery can operate the best way, a hotel, a hospital, whatever. That can be very useful for a global customer, with many sites, many breweries or many hospitals or many restaurants, whatever that is. Well, knowing through digital technology, what's the best performance, where we can help them get all the units to the standard of performance or world-class if they compare to other customers as well, or other industries as well, which is the power of the knowledge we have through the cloud. We used to have that in our people's minds, and that's still true. But on top of it, we have it as well in the ECOLAB3D cloud. And that's driving, obviously, the growth of the $15 billion we have, of this $152 billion market. That's growing within our own customers and growing with new customers as well at the same time, which is the circle, the customer circle, the growth strategy that we've been practicing for a very long time. If I take one example of a brewery, for instance, and I'm talking about the global brewing company with many breweries, obviously, how do we do that? Well, if you take a brewing plant, we usually start with what we call the cleaning in place system, which is the whole brewery, you don't need to dismantle it to clean it. You have solutions that go through the whole process, is being recycled until the whole processing unit is clean and safe. That's a system that we've been perfecting for many years for that industry, for instance. Well, when we have that, we bring a lot of other technologies, which can be around food safety, around water management, around pest elimination, around data management. Whatever that is, ultimately, that's how we circle the customer and then do it anywhere around the world in their plants in order to drive the same, or similar level of performance anywhere around the world. And then we measure the eROI, as mentioned a bit earlier as well. And this is our commitment. This is our promise for the customers. And every year, we discuss that with them and saying, how much have we delivered this year? How much are we going to deliver next year? How does it align with your own objective? And what's the share that we're going to have in terms of pricing? That's the way we drive pricing in our model as well, which ultimately, has made of us the sustainable or sustainability leader as an organization. Many call us the world's sustainability company because of what we do. We take it very seriously. This is true for our own operations, our own plants. We have over 100 plants around the world and almost 30,000 people that are serving customers around the world. Well, we want to make sure that that's done in as a sustainable way as we can, while we do it the same way for our customers. And interestingly enough, when we look at customers, many if not most, have made commitments in terms of energy consumption, carbon footprint and many have not made commitments on the water side, which is the main driver to reduce carbon footprint as well. This is changing, and this is changing very quickly because water is, well, what's impacting our customers the quickest and the most, and that's going to be even more true going forward. This is a good thing for us, and we can help. Obviously, our customers get there. So the way we measure that, well, we've made our commitments that we will help, for instance, our customers save enough water by 2030 for the drinking needs of 1 billion people. And as you can see, last year, we were at 109% of our target, prorated towards the 2030. You can look at it from a carbon footprint, from a food safety perspective, or from a health protection as well. And we make sure that every year we deliver, or if we don't, we will deliver the year to come as well. And in 2023, we expect it to be over 100% in everything that we're measuring for our customers. This is true for our own operations as well. Water and carbon, making sure that we are on our trajectory of our commitments by 2030 as well. We take that as a real commitment that we deliver year after year for our own operations, and for our customers as well at the same time. And last but not least, this is leading, obviously, so to a strong financial position. It's a strong financial performance. It's a strong balance sheet as well. We're expecting to be lower than 2.5x EBITDA. So by the end of this year, 90% to 100% cash flow conversion, we're much better than that in the third quarter. By the way as well, with always the same priorities for cash. First, it's always growing the dividend; then it's acquisition, investing in the business; and third, its buyback as well, as we've done so for many years. Well, the last 10 years, we've returned close to $10 billion to our shareholders in a combination of dividends and buybacks, as you can see. So we have a pretty steady story of doing that as well over time. So we like where we are. We like even more where we're going. We're the leader at what we do. How we do things, we have a strong position to deliver value for our customers. We have big opportunities out there to grow. Our margins keep evolving as well because we create value for our customers at the same time. So at the end of the day, like where we are today, and we will be in an even better place in the quarters and years to come. So with that, Andy, open it up.

Fabulous. Great Yes. If you want to submit a question, you can raise your hand or you can e-mail me at session2@rwbaird.com. I'll check it here. But I wanted to talk about something that was a little bit newer to me which was your commentary, Christophe, on focusing on selling programs rather than products. And I was just wondering if you could just expand upon that a little bit more. You mentioned that as a value driver. Can you just talk about the mechanisms there and what you're doing there on the innovation side?

I'd love to. So let me build on the example of the data center that I mentioned just before, which is a booming market, for all the reasons we know, AI, cloud technology, iPhones and so on that we all use. We used to serve those data centers by providing solutions for the cooling tower, for instance, or the wastewater plants for the data center, which is using a lot of water since there is so much energy that's being consumed to cool down the computers as well at the same time. That's going exponentially punctually up with the quality of the chips that are being used. Well, that was the way we used to sell, where it was taking care of the cooling tower, taking care of the wastewater plant. Today, when we work with the tech companies, is to align with them what's their ambition by 2030. Many of them, it's to get net zero water usage or net carbon water usage. We understand where they are today, what's the baseline, and we have a road map together with them to execute towards the net zero and that's selling an overall program, helping them get to net zero, if that's their ambition, where it includes all the individual products that I mentioned before, being the cooling, being the wastewater treatment, being whatever that is, ultimately, and we sell that as an overall program versus individual products.

And in that regard too, so do you get paid more for your technical expertise in the consulting that you do to develop the program? Or how does that manifest itself in margins? Is it packaged selling? Is it just -- is it more revenue volume leverage there? Or how does that translate to margin?

So we have different revenue stream. We have the chemistry stream for sure. We have the technology stream, what the 3D trays are, for instance, that we implement. In a data center, you get the rent of the technology. You have the data subscriptions as well, so the management of the data to optimize the data center, and at the end of the day, it's the total cost of operation reduction, the TVD, as mentioned before, that we deliver for them on their path to net zero, a share of it is driven by pricing, which is also a revenue that's driving margins.

Got it. Okay. Any other questions from the room. Otherwise, I've got one more. Great. I want to dig into gross margins a little bit more. I think the comment you made here is that 75% of the 400 basis points, so 300 basis points would come if you could just get your Institutional business back to the historical mix. Did I capture that correctly? Now this business is coming back and showing good growth. Are you saying that that's the mechanism the way you're going to get that back or just one way that you're...

It's one way. It's to make it clear that the 4-plus points that we need to get back to get back to a high watermark in terms of margin, 3 out of the 4 are coming from the mix of businesses which will come back naturally. And since Institutional is ahead of its recovery, well, it's going to come closer to that, quicker than we thought as well.

And this is an area of the business in Institutional that you've made some really big fundamental changes.

We did.

Do you believe that when you're 2 or 3 years away from now that the Institutional gross margins can be ahead of where they were pre-COVID when the volumes was...