Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Hi, everyone. Thanks for coming to the next session here at Baird's Global Industrial Conference. I'm Andy Wittmann. I'm the senior research analyst that covers facility services here at Baird. And really happy to be joined by Ecolab and the CEO and President, Christophe Beck. They've been great supporters of our conference for a really long time. And Christophe, we're just really glad that you decided to come back this year and spend some time with us. I know -- it sounds like you've got maybe a couple of slides that you want to go through just for people who haven't seen or know maybe the company. And then this one is going to be done as a fireside chat. So we'll look forward to that. And so Christophe, why don't you go ahead and get the table set a little bit for us?

All right. Thank you so much, Andy, and thank you for the cake as well. That's food service from Baird. This is really nice. So maybe just a few charts, assuming it's working.

Do you have the slide deck here, guys? Slide deck? There you go.

Hey, it's working. Okay. That's perfect. Just for the ones not too familiar with who we are. I see a few in the room, obviously, who know us by heart, so that won't be totally useful. But just a few highlights. First of all, we're a $15 billion company focused on 3 areas. Our purpose is to protect what's vital: people from infection and natural resources. And we do all that while helping our 1 million customers around the world operate better at a lower cost. So It's really a combination of better outcomes at lower total operating cost because you use less natural resources and impact people much less. Interestingly enough, so when we think about water scarcity, infection risk, climate, well, those are big challenges that require big capabilities in order to solve those problems for all the industries that we are serving around the world. Forty different industries, in 172 countries. We have 46,000 people that are serving this 1 million customer locations around the world. We have 1,600 scientists in R&D, we have 1,200 people in digital technology. And we've been at it for 30 years. So it's been a very long time for us as well. And what we do has a big impact on the world. We touch 1/3 of the world food production, 1/4 of the power that's being generated. And last year alone, we helped protect 1.4 billion people from infection, and enough water for the needs of 780 million people on our path to 1 billion by 2030. All while helping our customers save billions as well at the same time. We like the portfolio we have as a business. It's evolved, obviously, over the years. But very diversified, 40 end-markets, as I mentioned before. All businesses are growing, profitable. We're in a very nice place here. And in terms of markets as well, end-markets, that not always been true over 100 years, but all markets are doing quite well around the world. Europe being the most difficult one in a way, and even there so we have very high profitability level, which is really comforting considering everything that's happening over there. And last but not least, the performance has been a great performance as a company for 101 years. We started in 1923. That's been true in the last 20 years, as you can see as well on that chart. And if you look at the past few years as well, we've really addressed the challenges that we're -- facing every company, obviously, around the world, in ways that we're making our company better after COVID, after hyperinflation, after any shortages that might have happened as well in supply chain. This is the way we think about when we lead the company. How do we get to the long-term objective the best possible way? And how do we get through interesting times, crises, in ways that help us get better every single time after each crisis? And as you can see, that was important for us to get back to a performance that would have been the same if nothing would have happened during the past 5 years as well, and to continue on that path of 5% to 7% top line growth, 12% to 15% earnings per share growth, and leading to the 20% operating income margin, I'm sure we're going to talk about that, Andy, as well, over the next 3 years. So that's just a brief overview.

Yes. That's super helpful. It's really interesting, Christophe.

How long you been CEO now?

Four years.

Four years. And in 4 years, there's a couple of things that really stuck out, the things that were done differently under you than under your predecessor. And the first thing that really struck me is what you announced a couple of quarters now, which was One Ecolab. So just to set the table, Ecolab has a long tradition of this thing called "Circle the Customer, Circle the Globe," which is have your customers like you enough to take you other places, and do as much for them as you could everywhere. And One Ecolab seems like the kind of the next iteration of that, or I don't know, that on steroids. But why don't you talk about what's different about One Ecolab? Because your go-to-market strategy has evolved pretty significantly around that. And I thought it would be good opportunity to talk about it.

Yes, great question. So "Circle the Customer, Circle the Globe," described the way you did, so it has been very successful for many years as a company. Most of the businesses that we've built, the Pest Elimination business being one of them, has been a cross-sell operation. And we've been very successful at that. We've been building our Water business like that as well, Life Sciences businesses. We can come back to that as well a bit later. But it's been really driven by: how can I add in terms of services and solutions to the customers I have today in immediate locations and in locations around the world that they have? With One Ecolab, the objective is the same. It's to capture the $55 billion penetration opportunity that we have, which is basically what our customers are buying from other suppliers that they could be buying from us. The objective is the same, but the way we approach it is today the other way around. It's not what's right for us, adding new solutions. Everybody understands that that's better for Ecolab, obviously. It's much more to think what's right for the customer. And the way we're doing it is what we call the best-in-class model. And it started with 1 major customer that we have that asked me 3 questions one day. You probably know which unit in my world is operating the best in terms of business outcome, operational performance and environmental impact. The second question is, if all my units were operating at that best of performance, how much dollars would that represent? And third, how do I get it done? And that's the idea of One Ecolab. We start with the end in mind of saying, what's the maximum value that you can get if you get to your best-in-class performance within your company or compared to the industry best-in-class as well? This is the maximum value that we can deliver. What's the plan to get there? What are the solutions? What's the technology? What are the services that we need to bring in order to bring you there within a reasonable time frame? Usually 3 years. And that's what we try to accomplish with One Ecolab, that our customers know where we're going and how much they can deliver. Second, that our team has a clear path, they can come with their phone and they get in front of a unit and they know immediately what's the performance of that unit, what's the gap versus best-in-class, and what should I do as next 2, 3 actions -- sell action, obviously, so to help the customer get there. And we align the whole company with this idea of the One Ecolab serving 1 customer behind her or behind him in order to deliver that value.

And you're setting up your teams now for some of your largest customers with people, subject experts from the different lines of business, if I'm not mistaken. So you're really going much more collaboratively to those top customers now than you were before. I think that's part of it too, right?

It's a big deal. Our top 35 customers -- so now we've regrouped enterprise selling teams, that still include individual expertise because the water expertise, the health care expertise, the pest elimination expertise, the digital expertise are different. But they work together in 1 team to serve 1 major customer everywhere around the world for the top 35 today. And we'll expand that around the world as we progress.

And to do that, you -- one of the things, as you've managed the P&L, is you've been really trying to -- and you've been demonstrating that the SG&A line is really flattening out. You've made some investments, but it's been kind of flattening out. So like you're putting sales resources, but it's not incremental, it's just kind of redirecting them, if I'm not mistaken. Is that the way to think about how you've gone at these top 35 customers?

When we think in the past, Andy, so we had that chart that we were sharing with investors for decades, that people we had on the street were directly proportional to the growth of the company. That has changed with digital technology for many years. Today we don't need to do that anymore. And I think that with more or less the team we have today, we'll be able to keep growing in the future, but not in the same places, not doing the same thing. And digital technology is transforming the way we run the company. Our SG&A were at 29% in 2017. They are at 27%, I think, for the second half of this year, if I'm not mistaken. And we will keep improving as well in the quarters and years to come because of technology, while we keep investing in our teams in higher expertise, more training, more technology. So it's really a combination of an investment, productivity, that nets out to a better SG&A performance as well.

It really feels like the digital -- some of it is like you're making your own team more efficient. A lot of it is also making your customers more efficient. And the company has been talking about digital investments for a long time, but it kind of feels like you're really starting to harvest more of those benefits now. Maybe you can just talk about a little bit of the digital evolution of the company as it relates to the customer experience first.

So we've been in digital technology since 1991. So it's over 30 years. It's been a very long time. We have 1,200 people in digital technology in different places around the world. We have 100,000 systems that are remote-monitored today connected to one of the largest IoT clouds in the world. We did all that, all during that time, as part of the overall program we were selling for our customers. In other words, it was for free, while you were buying the solutions of the company. That has evolved over the last few years because the industry -- the models have changed as well. And we approach it the same way as phone companies do in a way where all the devices that we have around the world, well, needs to be leased. The applications that they're using to optimize the performance of a nuclear plant, for instance, comes with a subscription. And all the usage, data, transactions, remote monitoring, emergency services, from a consumption perspective, gets charged as well, so to the customer as well at the same time. We are on that journey of monetizing all the work that we've done for free for a very long time in ways that makes sense for customers and makes sense for us. And I really like the journey that we are on right now.

So I think your -- at least your pricing expectation, I think it was at 2% to 3% is what you're thinking now. And that's a little bit more than your historical average.

Quite a bit.

And so is this the delta? Is this one of the explanations, is monetizing these subscription services? Or what are some of the other contributors, I guess, to that?

The main driver on pricing, and for the ones not too familiar with us, so if we look at before this hyperinflation time, our average pricing was between 1% and 1.5%, with every single year pricing going up. We haven't had 1 year where pricing went down as an overall company, which is important. So there is the magnitude and the consistency of pricing over time. Today, 2% to 3%. And it's mostly driven not only by digital, but most importantly, by the share of the savings we're providing to customers. And what I was sharing with you with this best-in-class potential that we're providing to customer, well, we're delivering that on a daily basis then afterwards. How much savings am I realizing because your food safety is better under control, because your operational costs are better, because you're using less water and energy? Well, that adds up to a dollar term. And we agree with the customer, what's the share of that improvement that we get as a company, that translates into value pricing as we call it? And that's what's driving the 2% to 3% versus the 1% to 1.5%.

Yes. And so having the analytics to justify that is a really important part. And you've, I think, you've gotten better analytics out of your business over the years that, hopefully, you're able to make that case even stronger today.

We have it almost in real time today.

Yes. Shocking. It's amazing how much it's evolved.

Which is really good.

All right. Let's talk about some of the individual business segments next. I think it probably makes more sense to start off with the largest segment, which is the Industrial segment, which is where the Water, the Paper, the Food & Beverage, as well as the downstream are all parts of that. So maybe for the time we have, maybe it's too much detail to talk about all of those business segments. But maybe just at the highest level, Industrial seems to have a degree of cyclicality in most people's preconceptions. And so I was wondering if you could just talk about your business as it relates to the industrial economy. And if you see it as cyclical or not. And what things you can do to continue to grow despite whatever the environment gives you.

So as you said, so it's over half this year of the overall company. Industrial end-markets might sometimes be cyclical. They're not all of them, obviously. Our business is not. And every time that a cycle is happening in the market, for us, it's an opportunity to help our customers reduce their total cost, which is when they need it the most, and ultimately that drives higher margin for us. So in every cycle like that, we improve the margin of the Industrial business in a very nice way. And today, the margin of the Industrial Water business we have today is the highest in the world. It's a really cool place to be. But when I think about Water going forward as well, and water scarcity was a big issue before AI. Today with AI, it's getting even way worse. Just 2 data points that are important. From a power perspective, AI requires today 4.5% of the electricity that's generated in the U.S. It's expected between 10% and 15% by 2030. At the same time, and that's something that most companies forget and investors sometimes as well, is, well, the power that we use for AI will translate into heat that you need to cool, which means water usage as well at the same time. And AI will need, by 2030, the same amount of water than the drinking needs of the whole of India by 2030. That's on top of all the other challenges that we've had so far with our digital technology. So it's just making it a little bit more complicated. The good news is we have the solution. We have the technical solution on both fronts, for microelectronics or for data centers, to take those 2 examples, that I'm very passionate about. Well, we have the solution not only to help them use less water, but to reuse water as much as they can. One fab in Korea needs as much water as the drinking needs of 17 million people, 1 fab. And today the water is being used simply through the fab, added with a lot of silicium, unfortunately, not exactly great from an environmental perspective. So you have a quantity and a quality usage issue. Well, we're providing services to that that helps within the fab to reuse and recycle water in order to produce more chips, while reducing not only the water usage but the cost as well. And we do the same for data centers, especially with new technologies of direct-to-chip cooling where we have some really cool things that are coming up, where we're partnering with the tech companies to develop those solutions, in order for them as well to reduce water usage, and to improve uptime, which is the most important part for them.

Yes. Just drilling a little bit on the data center stuff. I know you said that, hey, it's obviously a rapidly growing business for you. Why don't you just help us kind of level-set how big it is today? Maybe if you could help us with how fast it's growing. And where do you feel like you stand competitively? With AI chips being so new and so many different technologies on how to cool them, there's a lot of probably first-mover advantages to be faster rather than slower. If you think about how the hyperscalers, they're just going and they're going to figure it out later. Your company doesn't operate the same way, but there's got to be some analogs with the way you're addressing that market where you got to be there right now, I would imagine.

And it's a cool thing. Everything is happening as we speak. No one has all the solutions, as you're saying, so everyone is going and hoping to find a solution along the way. And it's working quite well, generally. Except that if you look at the power usage, well, you see some of those connecting so to all the nuclear power plants. There was one announcing as well reopening a coal-powered as well, power plant, which is kind of shocking after all what happened, because we need to have enough power, obviously, so to fuel that. To your question, so we're not disclosing exactly the numbers in here, if we're not confusing everyone, but it's a few hundred million today, at very high margin. Certainly it's higher than the average of the company. We're investing massively behind both business opportunities. It's different technologies, obviously, so for data centers or for microelectronics, but both are water related. We've been 100 years developing science and expertise behind water, behind digital technology. This is what we've done for a living. So working with the end-users, being sort of the ones in Korea or in Taiwan, or the hyperscalers, so for data centers, well, we bring all the technologies from as many partners as we can within 1 solution in order for them to cool better or to operate better in a microprocessing plant. I like where we're going. There's a lot of organic that's happening, a lot of development that's happening as well at the same time. We're hiring a lot of experts behind it. We're also doing some M&A as well related to that. But there's nothing big out there because it's all new. So it's much more technology that you can acquire and bring together in order to make sure, in the case of a data center, that we can master a CDU, for instance.

Yes. Okay, great. It would be remiss not to talk about the legacy business, the Institutional business, the -- it's got the specialty business in there as well. This business has really come back so nicely for you, and you're showing the profit margins in here that are really giving some confidence. Can you just talk about how Ecolab has been able to drive the growth there? And what a lot of people see from the outside, it's one of your more mature businesses yet you're still able to get some decent growth out of it, as well as, maybe more importantly, the margins that you've been able to recover there. And how much more investors should be able to look forward to on that margin journey in Institutional?

It's been a great journey. That's where we started as a company, in our hospitality business with hotels and restaurants. We thought before COVID that it was kind of the end of a chapter in a certain way. That industry has changed dramatically during the pandemic, using, on one hand, much more digital technology, and at the same time, 1/3 of the people who used to go and sit in a restaurant, well, they don't sit in the restaurant anymore. They go through the drive-thru or they order remotely or whatever is your best approach to get there. But they don't sit in the restaurant. So we've been growing this year, 6%, 7%, in an industry that went backwards and people going to a restaurant going down 30%. So when you put that in perspective, the growth that we've had in a market that's not exactly going upwards, it's been a remarkable performance. It's been driven as well by one thing that, during the pandemic when everything sort of froze in a certain time, we kept everyone. It was close to 10,000 people who were serving hotels and restaurants. We made the decision to keep everyone, to pay everyone, to pay bonuses for everyone, to keep that expertise forever. It allowed us, obviously, to gain a massive share. So when the industry recovered, so we had a compounding effect, obviously, of growth. And today, so are we enjoying a relationship with customers that we had before and new customers that is better than it's ever been, while we use more digital technology than we never did in the past. So you have a combination of growth of share, of profitability, and new bases for the future that we never thought were even thinkable about back then.

And I think -- and again, in your 4-year tenure here, One Ecolab stands out, and the way you've restructured the Institutional business to become profitable in a new world, are the 2 things that really stick out to me from the outside. Like going to market digitally, yes, I mean, there used to be a lot of service calls, Ecolab people rolling up in cars. Still do it, obviously, super important to see those people. But a lot of things you can do digitally now with a camera and a service call, service manuals, other training techniques that you're offering digitally now in that business that you didn't have before. There's some obvious changes that, frankly, needed to happen, because without it, pandemic could have really wreaked havoc. So one of the things that I was -- it would be remiss of us also not to talk about the 20% operating margin target. So why don't you just kind of level-set for the room where you are today? And if I'm not mistaken, you guys are planning on getting most of the difference, the delta from today, to a few years from now for 20% by your gross margin. So maybe just talk about some of those drivers and the visibility that you have in getting those.

So we were planning to be at 16% this year. We'll be closer to 16.5% in 2024. We came from 14-ish a year ago. So a very good trajectory. Driven in great part through 3 things. Well, there's the traditional growth, obviously. There's value pricing. We talked about the 1% to 1.5% moving to 2% to 3%. That's 100% margin. Obviously, that's helping very nicely. And it's driven in a way that's good for customers, always that for customers, well, the net between what they gain in terms of savings versus the pricing is positive for them. So, good for them, good for us, good for shareholders at the end of the day. And the third one is really this digital technology, as we talked before, that we've been investing in for years. One Ecolabs are coming into play as well. That's improving the SG&A productivity as well at the same time. And that's why I feel really good about getting to 20% over the next 3 years, in an environment where the delivered product cost will turn up back to normal inflationary...

Yes. It's probably worth mentioning that, '24, you had a price tailwind over your cost. But now in '25, that's flipping, to the, frankly, a more common situation where cost is more of the inflationary thing. You're always working 6 months behind it, as opposed to '24, which was odd, unique that you had more price than you had cost.

Absolutely. Yes. Well, we had the advantage of having the tailwind of DPC, strong pricing as well at the same time, and volume that was going well. Plus the productivity. So that's a good mix, obviously. That's why we had outsized earnings growth during that time as well. And that's why I feel really good about the 12% to 15% with the type of growth that we have today and getting to the 20% over the next 3 years.

Yes. And the decomposition of this, and probably get this question all the time, but it's probably worth talking in front of the room audience, is like you're guiding 12% to 15% EPS growth to next year. Do you think 3 years and your growth rates that you're talking about with the 20% margin -- actually, the EPS CAGR between now and 3 years from now would actually be in excess of the 12% to 15% that you're guiding next year. So is there something -- how should we gauge the delta? Is there something else that -- is that conservative on the 12% to 15%? Is the 20% -- like how do you bridge the gap between the implied 3-year CAGR with 20% margin and the 12% to 15%? Or am I just making too big of a deal out of this?

Maybe. I think the key assumption is where inflation going to be in there, from a delivered product cost. Who knows? Pick your number. We've said it's going to be 1% to 2% next year and the years to come. It might be more than that; it might be less than that. So we might get quicker to 20% or it might take a little bit more time, but still within the 3 years. Who knows exactly where inflation is going to go? I guess, no one knows actually here. This is the biggest assumption. And I want to be in a place where the 12% to 15% is something that you can count on. And that's the Ecolab way of doing things, that longer term we stick to our commitments.

You're easy to get excited about Ecolab just knowing you for years. What are the things that you're excited about most at Ecolab today?

It's the growth opportunities that we have ahead of us. We talked about the global high-tech with data centers and microprocessors. I think that we are in a unique place. And nobody sees us exactly, so, in that growth opportunity. Life Science, we haven't talked about that, on the biotech industry. I think we're extremely well positioned to get on that growth path going forward. One that we didn't talk about, Pest Elimination, a great business that we have. High growth, high margin, no DPC, huge return on invested capital. And digital technology is going to transform that business. We have millions of devices that we need to check every day around the world. 95% are empty, as we know. It only tells you where to go. Except if you connected all those devices around the world, well, just imagine the service you're providing to the customer, at what cost ultimately is up to the company. That's a huge growth and margin opportunity that we have as well.

IoT mouse trap.

Absolutely. We call it pest intelligence.

Pest intelligence. I call it an IoT mouse trap, but it's pretty cool.

It's a better mouse trap?

You created a better mouse trap.

Finally.

I think we'll leave it there. Thank you, Christophe.

Thank you so much, Andy.

Yes.