Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Good morning. I'm Jeff Zekauskas. I analyze chemicals for JPMorgan. This morning, it's my pleasure to introduce the management of Ecolab. Representing Ecolab is Chief Executive Officer, Christophe Beck, who's been CEO of Ecolab for the last 3 years. Christophe is an interesting figure in the history of Ecolab in that he began to manage the company during the COVID period. And what he did is, he rethought the way the institutional business approached the market, he's rethought the pricing structures of Ecolab and really changed the profit growth structure of the company over a shorter period of time. Accompanying Christophe is Andy Hedberg, who's sitting in the second row, who has encyclopedic knowledge of Ecolab, and he's always a resource to everyone. Ecolab will do a more conventional presentation. And so, Christophe, please come. Thank you for coming to our conference.

Thank you so much, Jeff, for the nice words and for having us. It's always a pleasure to share our growth story. It's true that the last few years, they have been interesting years for everyone, I guess. The key question was how do we use those years that we couldn't plan for, as we all know with everything that happened, in a way that's helping us for the future to be in a better place to perform even better down the road. And I feel good with where we are today. And I've really been as bullish as I am right now about where we're going short term and long term as a company. And I've been 17 years in the company. So I've seen a lot being part of what we did in the past, and obviously, so how we shape the future of the company. I'll be talking, naturally, about the future. So I know that you all very familiar with the cautionary statement. I won't spend too much time on that, but much more for the ones less familiar with what we do. We're really in the business of protecting what's vital. We protect people from infections. We protect natural resources, mostly water and we're the largest water company in the world, and we protect businesses in helping them produce more products, better products, safer products, while reducing the total cost of operation by reducing the impact on the environment, and it's in the way -- seeding sustainability in a way to make more money for our customers which is counterintuitive in times where many look at sustainability as a cost. We have always seen sustainability as an opportunity to improve the cost of operations of our customers, which is at the root of our name. Ecolab comes from Economics Laboratory. It's not an ecological proposition. It's doing the right thing, the right way, leading to better results and better performance for our customers. We're in a place where we have unmatched reach and capabilities. We have 48,000 people in 172 countries, serving 40 different industries very specifically. We have groups of experts. We have no generalists. When you're working in data centers or in power generation or in car manufacturing or in pharma, those are dedicated experts in very specific divisions. When you think about how much we touch, we have over 1 million customer around the world, but we touch over 1/3 of the world food production, almost 1/4 of the power that's generated as well around the world, and we protect almost 1.5 billion people from infection on an annual basis. So the reach, the capabilities we have, no one else has around the world. And we protect the world's most trusted brand. It can be global brands, it can be national brands, we're here to protect those names in a way that what they do is protecting their customers and protecting the environment as well. And we work with those companies, as you can see so many familiar names, so for many of you here in the room, for years, for decades. And with many of those companies, we don't even have a contract. It's a relationship of trust. In good times or in less good times, we need together. And when we can stay 50 years with one of those great brands, well, it shows how much confidence they have in what we do, and how much we invest in their own future as well for them to perform even better. I like the portfolio we have as a business. It can be in terms of end markets. As you can see, so our Industrial business, which is basically our water business, as a company came out what we call Nalco Water in our own organization. This is a water company, it's half of our business. And then Institutional and Specialty, that's hotels, restaurants, convenience stores, retail stores is roughly 1/3. And then Healthcare and Life Sciences, as you can see, so 10%. And what we call Other is mostly our Pest Elimination business, which is a fantastic business, by the way, which is the most profitable pest business in the world, and the fastest-growing business as well. So when we call it Other, we mean a great business. When we think in terms of geographic markets as well, I like it quite a bit as well as you can see. So it's roughly half in North America. And then you have a quarter in Europe and you have a quarter in Asia and in Latin America as well. And the performance of those regions is very similar in a way, at times might be different, but ultimately, the performance of the company is relatively stable because we have such a breadth of end markets from an industry perspective and from a geography perspective. What's most important is 90% of our sales are recurring. It's razor-razorblades. We sell very few razors, but we sell a lot of blades. And you can't keep operating as a customer without the blades. So it's not the choice. It's a commitment for the future, which is really important for us in our model. That's driving very nice sales growth. It's been the case for the past many years, as you can see as well. We reached the $15 billion mark in 2023, which are record sales. So for us, even though it includes a spin-off that we made a few years back of our Upstream Energy business, didn't fit exactly what we wanted to do, where we wanted to go, and the margin profile as well that we were looking for. So even with this $2.5 billion of sales, we managed to reach record sales in 2023, which is a real achievement. That was our last year of our first century as a company. We started in 1923. We started with -- we ended record sales, record cash flow, record team engagement, record safety. It's been a hell of a year for all of us in 2023, and it's a great way to start '24 and our second century as a company. When you think about our margins, gross margins, in that case -- operating income margin, sorry, here in that chart, improving as well year after year. Gross margins improved as well year after year. Both need to go in tandem while we improve our SG&A productivity as well at the same time, then all 3 have improved for a very long time. So this is something we know quite well how to do, which is really laying down the path to get to an operating income margin of 20% that we expect to reach in the next few years, timing, mostly depending on external factors. Internally, I feel very confident that we will get there in the next few years, and that's the next stop. It's not the end of the story. And then we'll keep building. So beyond the 20% because many of our businesses today already beyond 20%. So this is something we know really well how to do. That's driving, obviously, very good earnings momentum, like the way it's evolved the last few quarters, especially in that inflationary time where we had to really get pricing in a way that's not price list increases, but it's a share of the benefit we provide to our customers, which is something which is much more sticky, and that always goes up, which is a very good model that we have. So '23 has been a great earnings year, with 16%, and we expect '24 between 17% and 25% earnings growth. And I feel quite good that we will get there in '24, which is a great base for the years to come as well beyond that, which is helping us get back to that long-term double-digit earnings trajectory. I feel really good about that. We've done all the right things during the last few years in order to transform our business, as Jeff said at the beginning as well, in a way, that's driving accelerated earnings growth for the years to come in a way that's sustainable because of our model as I shared with you. So we have strong momentum. That's been true so for the past. This is true for today, feel good for '24 and feel even better for the future. [ Why that? ] Well, when we think about the big trends that we are focused on. Well, there will be 3 billion more people in the years to come. By definition, mostly kids. This is very good news. The only challenge with it is that they will need more food, more water, more energy. And in the case of water, water we don't have. The world today is using as much water as what nature can replenish as a whole. And by 2030, we will need 56% more water than what we use today. In other words, that we don't have. Well, the only way to address that challenge is to reuse and recycle water, which is exactly what we do in our water business, so essential so for our customers and for the world as a whole as well. We're the leader in most of what we do. We're the world's water company with close to $10 billion in sales in all water applications we have across all our businesses. So clearly, the #1 in water. We're the #1 in hygiene. And we're the emerging leader in Life Science. Life Science means pharma for us, health care means hospital, which is different, obviously, life science is a future growth engine so for us, we're investing behind it as we should. We've built those businesses one by one along the years when we think about the last 20 years. Started in hygiene, added Pest Elimination, added water and we add today Life Science, and we'll be keeping -- adding new businesses, starting with digital, which is a big area so for us. And how we drive value to our customers? Well, we bring expertise to a site. We bring technology. We bring chemistry. We bring data. And we do it in person. This is our team doing that. It can be in a data center. It can be in a hospital. It can be in a car manufacturing plant or it can be in a hotel. And those people who are experts at what they do. They understand how it operates. They understand what the best performance should look like. They bring the solutions that we can provide. And they help those units get to the best level. At the end of the day, it's to help them deliver the best possible outcome, whatever they produce at the lower total cost because they reduce the total cost of operation. That's been the model for 100 years, and we keep perfecting it day in and day out. We have a clear metric for that as well that we call eROI, that's exponential return on investment, with 3 components that we translate in dollar terms. It's how do we help you produce better outcomes, better burgers, better cars, more uptime in a data center, less hospital-acquired infection in a hospital, we translate that into dollar terms. The second is operational efficiency, that's capacity, that's labor force, automation, you name it. And the third one is environmental impact, how much water, how much energy, how much waste, can we help you optimize, ultimately. All 3 translates in dollar term. We commit to that improvement, and we deliver it day in and day out to get to that. Part of it translates into price, and that's how price becomes as well a growth engine for our company. In order to create more value, we need a lot of innovation. We have a great innovation force in our company, over 1,000 scientists, the vast majority being PhD in water, in hygiene, in life science, the big fields that we have and the pipeline is really strong, and keeps growing in a very nice way as well, addressing some of the biggest challenges that we have out there. We have 1,000 people as mentioned, so working in R&D. They have big issues to solve. It can be helping data centers to get to net zero. It can be helping produce semiconductors in places where there is no water. That's where most of the plants are going, fortunately or unfortunately, depending on how you want to look at it as well. We help restaurants as well operate with new systems, new software becoming really the Microsoft Office of a restaurant in our hospitality business. Those are big challenges that our solutions will try to really address. And we have over 1,000 people as well in digital technology. We started in the '90s. It was not called AI. It was not called the cloud. It was very different but we invented what's called the connected chemistry, which means that we can track and trace what's happening in each operation around the world. Today, we have 100,000 assets like cooling towers, wastewater plants, process control, anywhere around the world that are connected to ECOLAB3D. We can monitor 24/7 what's happening, correct the performance or understand where we have performance gaps as well that's helped us build one of the largest industrial cloud in the world, which we call ECOLAB3D. How do we use that? One example is Industrial Asset Intelligence. We sell that to our customers, as a subscription. It's basically based on that connection of data. Well, we can help them understand what's the performance of the best-performing data center around the world. That system helps you drive the same performance for all the other ones to the best-in-class performance as well at the same time in real time. We call it Asset Intelligence. I guess we should call it artificial intelligence or to have acronym here, but that's been a program that we've been building for years. And the term AI was not exactly as fashionable as it was now. So that's why we kept as well the same name. And ultimately, those customers can deliver the best, safest environment in a hospital, the best food in a food plant, the best uptime in a data center when they use all our solutions in all of their sites as well around the world. That's a $152 billion market that we're serving, and we have 10% of that market since we're a $15 billion company. As you can see, $55 billion of our opportunity out there is available in customers we already have a relationship with today. That's the easiest to grow, and that's the cheapest to grow as well, as we all know. To give you a few examples, when we address a data center, where we start is with the cooling system, which is so essential since it's a computer generating a lot of energy, and you need to cool it down in order to keep operating as well as one. Well, once you have the cooling system, you can add as well so some digital technology, you can add the wastewater treatment. You can add Pest Elimination. You can add all those different applications that help the data center operate safely and more efficiently going forward, that drives penetration of solution, and that increases margins because we go there anyway. So the cost to serve is pretty small. In a food and beverage plant, we always start with what we call the clean-in-place. It's basically -- you don't need to dismantle the whole production system. You just flow through chemistry, that is cleaning, that is drying, that is sanitizing without dismantling anything, that's all digitally controlled. Then you add all the water management system. Then you add all the food safety systems. You add the pest elimination. You add all the different systems around it in order to make that plant produce the best possible beer, the safest way at the lowest total cost, while reducing as well the impact on the environment, we translate that in dollar, and we drive that as well in terms of pricing. And last but not least, if you take a pharma plant while we focus on the cleanroom, first and foremost. And then we add water technology, hygiene technology, contamination prevention technology, pest elimination and all that. That's what we call Circle the Customer - Circle the Globe strategy in order to get more of that $152 billion market out there, which ultimately is what we do, helps us become what some are calling the world sustainability company because of how we help customers reach the sustainability goal in a way that is a good financial proposition for them and for us. But it's also because in our operations, we want to be the best example in the world while we do the same for our customers. And our customers are raising the bar, every single day in terms of how they want to operate or have to operate if they are in places where there is no water. For instance, you think about the new semiconductor plants, well, most of them are being placed in deserts, in our country as well, there is no water. Well, obviously, you need to put the bar of how much usage of water you want to have or could have much higher. That's helping, obviously, accelerate our demand for all those customers to reach their objective in a way that makes financial sense. And when you look at it in terms of numbers, we're delivering pretty well compared to what we had said for 2030. We aggregate all the impact of our customers. If I take just the example of water, we've made the commitment that by 2030 versus 2015, we'll help save 300 billion gallons of water. This is the annual drinking need equivalent of 1 billion people, just to put it in perspective, and we are beyond our target trajectory in 2022 and in 2023. The same as well. We really try to get close to our target year in and year out. So it's delivering environmental impact, while delivering operational performance for our customers that drives financial performance for our company as well. Which brings me to our financial objectives as well as a company. We've been very clear what our target is 5% to 7% organic in terms of top line average, there will be some better years, some years where it's a bit slower. But at the end of the day, in terms of earnings growth, it's always going to be sort of in the range of 12% to 15% or more in the case of '24, as I mentioned as well and reaching this 20% OI margin in the next few years and then keeping moving up from there as well. Cash flow extremely strong. We have a great balance sheet, and we have a great cash machine as an organization. Last year has been a great example and we had a great conversion factor as well, which was north of 100% as [indiscernible] as well. 2x in terms of leverage is our objective. When we make big acquisition, it goes a little bit higher. We experienced that in the last few years. That was the case when we invested in water as well. We always get back to 2 in a very organic way. And we always use that model going forward, and having a strong balance sheet is an objective we have, it's an objective I have, and I will stay to that. That being said, our capital allocation priorities do not change. Its first dividend; second, investing in the business; third, cash buyback that we've done for many years. When we look at the last 10 years, we have returned $10 billion in cash to our shareholders being through dividends or in buyback, as you can see. So very consistent year in and year out, so every single year done in a very good way. So when I look back, like where we are, like where we're coming from, I like even more where we're going. It's a lot of execution, obviously, that we love doing. We're an execution-focused company. But I like the fact that we're leading in 2 big fields: in water, in hygiene. We're the emerging leader in life science, which will be a growth market in the years to come as well at a very high margin. We have a model that's driving growth. We have margins that are improving because we share the improvement that we are generating so far with customers as well. And we have a long-term story of good financial performance done the right way for our teams, for our customers, for the environment and obviously, so for our shareholders. So in a great place today, in a difficult world, as we all know, unpredictable as well, but feel really good with where we are and where we're going. So with that, Jeff, I'll maybe just pause here and we can open up for questions.

Okay. You can either take them from there from the audience or you can...

That was very helpful. You talked about AI as a pillar of the solutions you bring. Could you give us some use cases where you're deploying AI yourselves for your own business? And then some of the more interesting or common problems you're solving for customers deploying AI?

It's a great question. And I know that AI sort of has become fashionable, but it's for us something that we've built over the years, as I shared with you. The fact that we can connect thousands of assets around the world, that didn't happen in the last 6 months. This is something that happened over the last many years. And the best way to think about it when we think about AI, so for us is really take an example of a restaurant chain with thousands of restaurants around the world. There's an easy question that could come from the CEO saying, "What's the best-performing restaurant that I have in my enterprise in terms of guest satisfaction, in terms of operation performance and in terms of environmental impact. Which one is it?" That's a difficult question to answer, first and foremost, especially in franchised operation, which is often the case with restaurants and hotel chains as well. We can answer that because we have that data because either we're connected to them, or we have someone visiting them and collecting as well that data. Then there's the second question saying, "Well, if I look at all the other restaurants in my enterprise, well, how far are they from that best performing one? And how much does it represent in terms of dollar terms as well, environmental impact and customer satisfaction?" Well, we can answer that question because we have the data as well, and we can translate that question into an opportunity for them. And the last important part is that our teams that are visiting the thousands of restaurants out there, well, can see what they need to do on their phone. I'm coming to that restaurant downtown Bangkok. And I want to know what's the performance of this one. What's the best-performing restaurant of that chain? And how can I get to that best possible performance with what we can provide? You have all that information, all that intelligence at your fingertip on your phone that you can provide to the customer and then prove the value that you've created and merchandise it at the head office afterwards. That's the way we think about human intelligence that we used to have in every people's minds around the world serving our customers. Today, it's in the cloud, and we can spread it around the world. That's the core way of how we look at AI and how we plan to merchandise it, and to monetize it as well ultimately. In the past, it was for free. It's becoming every single day a little bit less for free.

Could you elaborate a little bit on what kind of data do you get that the customers of the chain restaurant, for example, that they do not have and you can help them get better in understanding their own business? And why do you have that data? Or is it among the customers who's like less advanced in technology versus you so that you'll enable them to do better?

It's a great question. And it's a combination of both. It's data they have, it's data we have, and ultimately, it's their data because it's their operations but that we collect, essentially. We do audits for the hospitality business, retail stores. You take the biggest brand in this country, we do audits for those stores all the time. Brand audit, food safety audit, environmental audit and operational performance audit as well. When we do those audits, we collect a lot of data, obviously, because we're doing the audit ourselves. We have a lot of our systems that are connected to the cloud as well, where you get a direct feed of information through ECOLAB3D. And we have -- once we get that information, well, we can process that information and try to understand what's the gap versus the best-in-class as well out there, and that's our cloud that's helping us do that. So it's a combination of our people collecting data. It's data coming directly. So through our connected systems and it's data that's provided as well by the customers. And in some cases, which we can talk separately. It can be external data as well, weather data, for instance, which has a big influence in terms of infection risk as well when we talk about water, steam, air that we can add to it as well and provide in a packaged form ultimately so to the customer.

Christophe, so ECOLAB3D is really exciting. I was wondering if you could share some numbers around it as in like when you guys started offering it to your customers, how many customers, where is that revenue accounted? Anything you could share would be very helpful.

Yes. So the numbers we've shared and, honestly, we will be sharing over time always more because it's relevant for us, it's relevant for you, obviously. What we've said is that we have 100,000 assets that are connected today, so cooling towers, boilers, wastewater plants, production plants, and you name it. So that's a number that we have out there. What we've said as well is that in our Industrial world, 20% plus of our sites are connected today, whereas in Institutional, where we have way more sites because it's our restaurants and the hotels, convenience stores, they're much smaller, but you have more. It's closer to 5% penetration we have there, which I see that as a huge upside potential because it's enough to have the critical mass and all the technology to make it work. And at the same time, it's showing the upside potential that we have both in Institutional and in Industrial businesses that we have that we can not only deploy but that we can monetize as well in the future at very high margin because digital technology are being subscription, being data, being consulting, ultimately do not have much raw materials as we know as well. So we are working on sharing more openly in the years to come how much sales we have there, how much margin we have there. We're not ready for that, but it's relevant, and it's going to become really significant in the near future.

In a company that does so much with cross-selling, can you talk about unraveling hospitals to sort out the high-return business, the low-return business, that you can concentrate on the high-return?

It's a great question because health care has been -- it's a small business for us. It's less than 5% of our sales, and we've been driven by the mission of reducing hospital-acquired infections. It's not worked out as quickly as we were hoping or as profitably as we were hoping as well at the same time. The incentive system for hospitals to get on board for that is not exactly aligned with the outcome of the patient, unfortunately. That's one part of the problem. But what we've understood for us serving hospitals, the place where we make most of the money is when we have a razor-razorblade system. And it's mostly in endoscope reprocessing and in instrument reprocessing. In other words, it's the dish machines of the hospital. It's obviously more high-tech than dish machine in a restaurant, but where you have a cleaning system for endoscope and for instruments, then at the same place in the hospital, but that's kind of the razor, and then you have all the blades, which is ultimately, so the chemistry that you need in order to clean and sanitize instruments and endoscope. That's a business that's extremely profitable for us. It's a business we know exactly how to run because we've learned in hospitality how to make it work. And I think that's going to be the future of health care.

Curious to hear more about the Pest Control business, what's the strategy targets there? And how does it compare with Rollins maybe?

I love it. We call it Pest Elimination, which is very different than controlling. So making sure that your pest are controlled in your house is not exactly helpful, but eliminating them from your house is really helpful. And by the way, we don't serve residential, it's purely commercial. So it's business-to-business. We do $1 billion in that business today. It's the fastest pest business in the world. It's the most profitable business in pest elimination in the world as well, so compared to a few names that you mentioned before as well. And as you will see in the first quarter, we will start reporting Pest Elimination as one segment instead of having it in Other as we used to have as well in the past that you can see how that business is truly performing, which is a terrific story and keeps getting better.

Yes. Could you just expand on why 20%? I mean, it's a round number, but is there any reason why you're showing good margin improvement now, but the margins seem to have been stable in the past. So why 20%?

It's a great question. 20% is the next train station, where the train is not stopping at the 20% station. It's to have -- first, we have many businesses that are north of 20% to begin with. Pest Elimination being the obvious one that we just talked about as well. Life Science, way higher than 20% as well. So it's to have a clear rallying cry within the company that everyone needs to get beyond 20%. It's to have a clear direction for you investors as well to understand. So where do we want to go? But this is just the next step. Once we get 20% in the next few years, it's to get to 25%, and we're not going to stop at 25% because we have businesses that are north of 25% today as well. So we will always go up. It's for you to see so what's the direction of travel, what's the timing we're thinking about it, how do the pieces come together. But you're right, it's a round number, which will happen one year, and that will be it because we will keep moving up so from there the year after.

You mentioned about recurring revenue before. Can you just elaborate on that? And then do you, in the long term, which vertical has more potential to bring up the recurring revenue? And then, which vertical do you feel you can manage better on maybe on a shorter cycle business, like if you can elaborate on it?

We don't have short-cycle businesses. We're not interested in those businesses. So we never enter a short-cycle business. And if there's one coming in through an acquisition, for instance, we take it out. We're not interested in short-cycle businesses. All our businesses have 90% plus recurring revenues. But it's very different types of revenues. It can be capsules to produce glass cleaners in a restaurant, or it can be a tanker to manage water in a nuclear power plant. It's obviously not the same technology. But you always have a dispensing solution equipment that is using our chemistry, using our data in order to translate it into revenue, ultimately. So recurring revenue for us is 90% plus of our sales in every single business, in every country that we have around the world, and that's never going to change. I think so we're coming at the end. Thank you so much for joining us. And if there is any other question, please reach out to me or to Andy Hedberg as well here, but really like where we are and even more where we're going. So thank you, Jeff.

Thank you. Thank you for your attendance.