Ecolab Inc. (ECL) Earnings Call Transcript & Summary

It's a pleasure to host this next session with Ecolab. And we have Scott Kirkland up here with me. Scott's been with Ecolab for 20 years in a variety of finance roles and businesses and regions, previously was at Novartis and like many CFOs, cut his teeth at PwC. So glad to have you here, Scott. Andy Hedberg is back here if you need to reach him. So go through some slides, and then we'll get into the Q&A. So glad to have you, Scott.

Awesome. Thank you, Steve, for the nice introduction. Thank you all for coming to listen to us today. I'm really excited to share with you Ecolab's great growth story, which I've been, as Steve said, a part of for about 20 years. Before I get there, I have to start with our obligatory cautionary statement, which I'm sure you're all very familiar with. So I will not bore you and read this verbatim, but I will let you take a peek at that. And with that, I will get on to the fun stuff in the conversation today, okay? Ecolab's purpose is protect what's vital, and that starts with protecting people health. We do that by protecting people from infection, whether it's in general public spaces or across the entire food chain. We also protect planet health. And we do that by making sure our customers can operate very efficiently while using as little water is absolutely necessary. And through the combination of those 2, we also protect planet health -- and business health, sorry. And we do that through the combination of those 2 by helping our customers deliver on their sustainability promises, but doing it in a way that improves their P&L because we know from experience that being sustainable does not require a green premium. Ecolab at its core is the leader in water, hygiene, infection prevention. We're an innovative and trusted partner at more than 1 million customer locations, leveraging the expertise from our 48,000 associates, and we support customers in 40 industries in more than 170 countries. And those customers choose Ecolab for our science-based solutions, our data-driven insights and the world-class service capabilities that we have to support them, all of which is really helping our customers advance their goals around food safety, around clean environments and optimize water and energy usage. Those relationships are with some of the world's biggest and most trusted brands, many of these relationships that we've had for decades. Starting with our Institutional Specialty business. We work with restaurants and hotels like this one to make sure that they have the same hygiene standards across their entire footprint. Looking at our Industrial business, which is about half of the company and focus primarily on water, which I'll get to in a second. But they focus on water in a wide variety of industries. And then in our Healthcare and Life Sciences business, working with hospitals and pharmaceutical companies to help make sure they have clean and sanitary environments, but also helping purify medications through our Purolite business. And last, but certainly not least, is our Pest Elimination business, a fantastic business that is sold across the rest of our end markets, a real great cross-sell for us. So as you can see, we're very balanced in terms of the markets that we operate, in the segments we operate and a great customer set. And what we have, what we call a razor-razor blade model. And what I mean by that is that more than 90% of our revenues come from consumable products. Those products are also really critical to our customers' operations. So as a result, we have a very predictable revenue stream. So with the balance of business, those great customers and these attractive end markets that we serve, we've been able to deliver consistent OI margin expansion while also continuing to make investments in our business to fuel long-term growth, and I'll talk about those growth targets in a little bit. As you can see here, in 2024, our organic OI operating income margin got to 16.8%, which was a record high for us. That was an expansion compared to last year of 290 basis points. That's on top of the 140 basis points we delivered in 2023 over 2022. As a result of that and the trajectory we've been on, we are very confident that we're going to hit our 20% OI operating income target by 2027. And that's one of the long-term financial objectives that we have that you can see here. And our business is in a great place, we're in growing markets and positioned stronger than ever, which is why we feel very confident in these long-term financial targets, including the 20% OI margin target, our 5% to 7% sales growth target and our adjusted EPS growth of 12% to 15%. So now that I've introduced you to Ecolab, I want to talk a little bit more about what we do, who we serve and the huge opportunities in front of us. So as you probably know, the world continues to face real challenges around public health, food scarcity, water stress and climate change. For example, it's estimated by 2050 that we will have 30% more people in the world, that's about 2 billion more people on the planet putting even more stress on natural resources and food requirements. And by 2030, it's estimated there will be a 56% gap between the supply and demand for freshwater. And you've probably seen that issue is becoming more, more prevalent as we see global droughts around the world. And by 2050, it's estimated that we'll need 47% more energy due to the increasing population, and frankly, that does not even consider the exponential demand and energy from the advent of GenAI. And water is really at the nexus of all of these global needs and issues. And Ecolab, as I'll talk more about, is a leader in water technology and solutions. We help customers solve some of these biggest challenges. Smart water management is core to what we do, and we deploy it across the vast majority of our business. As I mentioned, Industrial is focused on water and has the big exposure to water revenue. But our Institutional Specialty business also has a very significant portion of their revenues, as you can see here, about 70% connected to water because of our programs like warewashing and commercial laundry. And Healthcare and Life Sciences also touches water in a significant way as a result of our infection prevention programs and our Purolite purification programs. Here's Ecolab's market. It's large, it's growing and it's fragmented. And it continues to expand as we add new solutions and innovations focused on helping our customers solve their biggest challenges. And frankly, we love growing our sales fast, but we want to grow our market opportunity even faster. And as you can see on the bottom here, we have leading competitive positions in nearly every market that we serve. How we achieve this growth and these results is really helping our customers. And we do that by deploying dedicated on-site expertise in every market that we serve, whether it's power generation, a data center, a pharmaceutical company, a restaurant, a hotel, you name it, we deploy dedicated experts in those fields. Those teams get to know our customers' operations intimately, right, and understand how they operate and then deploy our technology, our data and their expertise and know-how to help our customers deliver what we say is the best results at the lowest total cost. I'll talk more about that here about what that means to us. Our value proposition rests on that ability to drive these high returns for our customers. And that's due to the fact that our cost to our -- that we are to our customers is small, very small relative to the benefits we achieved, right? And those benefits are demonstrating how much water and energy we can save as well as labor and waste. The combination of those things is what we call total value delivered. And here's that equation here. If you look at water, energy and waste that equals our total value delivered, and that is core to our value proposition. Also key to that growth and that customer value is our long history of innovation. Shown here, you can see the last 5 years of our innovation sales. In 2025, you can see in that last column, we're anticipating to launch our biggest innovation pipeline ever at $1.7 billion. In 5 years, and in cumulative revenue that equates to about 2.5x to 3x that amount. So over 5 years, $1.5 billion in year 5 -- $1.7 billion in year 5. That contributes to what we call our vitality index, which is an important KPI for us. And that vitality index, what that means is the percentage of sales over the last 5 years from products that have been launched in the last 5 years. In the past 5 years, we've also pivoted, as you can see here in the dark blue, focusing on what we call breakthrough innovation, pivoting from just product innovation to bigger, more impactful program innovation that have a bigger impact and value to our customers. Here's a few of those examples of breakthrough innovation, focused on our biggest growth opportunities like global high-tech water, life sciences and digital. These innovations are really tightly aligned to our customers' biggest needs. As part of that innovation, as I mentioned, is digital. It continues to be an important part of our digital foundation and our innovation. But we've been building on this concept for decades of what we call connected chemistry, building on a foundation from our 3D TRASAR technology in the Industrial business that we've continued to expand across to other markets. And we've innovated that to a point where customers can understand and see their water processes and water quality on a real-time basis. And we do that, as you see here, by being able to collect over 120 billion, 120 billion unique data points. And through that, we connect that to our Ecolab 3D cloud. And by looking at this data, it allows us to see across the customer's footprint and understanding the best performing location such as a power generation plant and then use that data and insights to help understand how they can deliver that same level of performance across the rest of their global footprint. Here's an example of how we drive our value and growth through our One Ecolab sales strategy in this lodging customer. In this lodging customer, we serve the front of house, the housekeeping, the pool and spa and the laundry. But we also help deliver the hygiene and food safety at the restaurant in this particular location here. At the same time, then we bring in other cross-divisional programs as part of our CTC and One Ecolab lab strategy to bring in expertise from Nalco Water, Pest Elimination and our EcoSure auditing business. The combination results in significant savings for our customers. In this case, it's 160 million gallons of water that we've helped this hotel save with a total value delivery of $10 million. Here's another example of how we circle the customer in a food and beverage plant. It starts like in all of our businesses with an anchor technology. The anchor technology, in this case, is a Clean in Place system. And what the Clean in Place system does, it allows us to efficiently sanitize and clean the production lines without having to dismantle it. And then in addition to that, we bring in other solutions, as I mentioned before, like water treatment, pest elimination and circle the customer the solutions that help them drive a total value, in this case, saving over 960 million gallons of water and delivering a TVD of $18 million. Here's another example. This being for a data center. And as you probably know, this industry is growing at a very rapid pace for the exponential increase in AI. A typical data center like this one, you can see the black boxes there, has a lot of servers that generate a lot of heat. That heat has to be dissipated in order for this data center to have 100% uptime. And a single data center can use as much water as a city of about 50,000 people, okay? So very water-intensive and continues to be even more so with the rapid expansion of AI. And you'll see our various water offerings, which is starting with the pretreatment of the incoming or the influent water, but also the cooling water for key process equipment, the humidification systems and then on top of that, we added digital programs to help optimize both water and energy usage throughout the data center. This results in a really large annual savings, both in water and a total value delivered of about $8 million. So if you look at the markets that we serve, it's about $150 billion or $152 billion to be exact, right, with almost half of that market being customers that we already serve today, including the $16 billion in sales that we currently have, but that represents a $55 billion opportunity with our current customer set. And then there's another more than $80 billion opportunities with customers that we have not yet sold. But we get after both of these opportunities through our One Ecolab enterprise selling approach and the leading innovation that I referenced earlier. As I've talked about a lot through this conversation is that we're driving best performance for our customers and cost savings for our customers, but at the same time, having a huge impact on their sustainability. And as a result, our solutions to help our customers save money and do it more sustainably places in the middle of some of their biggest challenges. They come to us trying to help solve and reach their sustainability goals. And we do that by looking at the commitments they've made, understanding their operations, where they are at today and how do they -- helping them close the gap to those long-term targets for sustainability. Here's an example of just how this is progressing. This is showing disclosures that companies make around climate change and water. You can see a significant increase in disclosures around climate reporting coming from the Carbon Disclosure Project, that's the green line. You can also see in the blue line that the reporting and disclosures around water are also increasing, but not at the same pace. And this is where there is a huge opportunity because we know that smart water strategies are very important and very critical because there are a significant portion of greenhouse gas emissions. And this is where water is at the nexus of many of these problems. Shown here in this slide is our customer impact goals because the biggest impact that we can have in addition to our own operations, but the biggest impact we have in sustainability is helping our customers achieve their goals. And we do this helping them around water, climate, food and health. You can see here, this is 2023 data, the 2024 data will be coming soon, is that in 2023, we help customers, on the far left here, conserve 226 billion gallons of water. So that's equivalent to the drinking needs of 780 million people, okay? To say that again, we help save the drinking needs for 780 million people, a fantastic number. We also helped avoid 3.8 million metric tons of greenhouse gas emissions, provided safe food to 1.4 billion people and cleaned 60 billion hands, if you can imagine that. So as I've talked, we've demonstrated a very long-term ability to generate strong financial performance and doing this over a very long periods of time while helping our customers achieve their sustainability goals. That strong financial position starts with our long-term targets. On the upper left, I talked about some of these earlier, our sales goals, driving 5% to 7% sales growth every year. Our 20% OI margin target that we will hit by 2027 and annual adjusted EPS growth of 12% to 15%. And we have a very strong cash generation model. We have free cash flow conversion of 90% to 100%. And on the bottom left, you can see here, our net leverage target is about 2x net debt to adjusted EBITDA. Frankly, we're a little bit lower than that right now, but that provides us a lot of optionality to invest in the business. And we have clear capital deployment priorities that we've had for a very long time. The first is increasing our dividend in line with earnings, which we've done for more than 30 years; investing in the business and including attractive M&A.; and then third is repurchasing shares at attractive prices, which we did last year and repurchased $1 [ billion ] of shares. We're certainly committed to delivering attractive growth for shareholders, driving great returns in addition to the great operating performance that I've shown here. And over the last decade, we've returned $11 billion in cash to shareholders through a combination of dividends and share repurchases. So in closing, we love our mission. We love the position that we hold. We know what we do for customers matters. And that matters not only for our customers but for the communities around them and we do it in a way that helps to improve their profitability, not just their sustainability. And we're continuing to -- our strong legacy of strong financial performance and shareholder returns. Thank you for listening. Steve?

All right, Scott, come on over here. If you want to ask Scott a question, raise your hand, Sharon will bring you the mic. I got a few for you. You guys hosted an event at the old Nalco facility outside Chicago a couple of falls ago. And I got to tell you, one of the takeaways that I had from that event was a comment that you just made a few minutes ago about you have experts in all of these various industries. One of the comments that I got at that event was you hire individuals from those industries that have that understanding, like you may have somebody that knows how to treat water, but to go into a food and beverage facility, do they really understand how it works? Is that a fair characterization that some of this expertise wasn't just developed in-house, it was -- you brought that expertise in?

Yes. We certainly hire great talent all the time. But I would tell you, we hire both experienced industry experts, but also hire and develop people right out of school, chemical engineers; in the case of Life Sciences, PhD. So hiring people who have deep expertise in this field, but having great expertise given our long tenure. As you said, I've been at Ecolab 20 years, and I feel like I'm a newbie in a lot of cases because there's been a lot of people that have been there 30 and 40 years that we retain people and that expertise that is passed on to the next generation. And so -- but we continue to develop internally and hire externally where it makes sense.

Also at that event, we really were drilling into this One Ecolab concept. And I was just curious, you made a comment on one of your slides about this, whatever, it was 120 billion data points or so forth. Does that digital platform you have help you win business or does it help you cross-sell or both really?

As I mentioned before, digital -- we have a long history and digital foundation with 3D TRASAR. And so it's an important part of it. As I think about our business, it's like a 3-legged stool, Steve, we have innovation on the chemistry, we have the equipment and the technology, the data and then we have the expertise. And those 3 things are the moat that we have. And so certainly, the digital technology, helping our customers solve their problems, that's an important element. And Industrial has been doing this for a long time with our 3D TRASAR program and continue to add other programs on it. But we've also been investing in digital over the last several years in an accelerated way, where all of our business have a digital foundation, if you think about Institutional with the launch of our DishIQ, which is the Smart Dish machine; or in pest, we're investing in Pest Intelligence, and we are seeing the uptake in the market from those. And it's benefiting customer outcomes that also helps deliver operating efficiency for us. But we're also investing technology from an internal operations standpoint, where we're able to invest in technology to bring data together so we understand where the opportunities are to help solve customer problems. As I mentioned, like the best-in-class, where we can use the 3DT monitoring, we understand what the best-in-class plant is in industrial footprint across the customers enterprise and then how -- what is happening there that we can replicate it across the rest of the universe? But also being able to cross divisionally, it's enabled our One Ecolab program where we can see opportunity across our different verticals, right? Pairing our ERP system data, which we've invested in as well as our CRM data to understand where those opportunities are and then connect that through the -- what we understand where a best-in-class solution customer is, what solutions they're deploying and how do we extrapolate across that -- across their entire network. And by the way, that technology, when we have that technology, we have a very high customer retention rate already. But when we have that technology, it's even more so.

In a couple of your examples, you have a water treatment part of the business, you have a cleaning technology you're providing, maybe you have the pest management part, is that also part of this platform is to leverage that loyalty you have in one of those to also gain share in these other businesses?

Yes. Totally, as we looked at that $150 billion market that I talked about earlier, there's a $55 billion opportunity with customers that we already have relationships with. Some of that's penetration of solutions with an additional division -- with one division, but sometimes it's just the cross-sell between different verticals or different divisions. And we've always had a circle to customer strategy even before I came to Ecolab. It's been part of our strategy for a very long time. And how I describe One Ecolab, it's operationalizing that strategy, where it happened organically in the past sometimes, but how do we bring those teams together to provide those cross-divisional solutions to customers. For example, pest, as I talked about, the pest business is a cross-sell opportunity across all of our segments. In the pest business and their opportunity, they could double or triple size of the business if we sold the pest elimination solutions at every other customer that we have, whether it be food and beverage or institutional or a pharmaceutical company.

How do you use this One Ecolab initiative to cut costs? You had a slide where that shows how you're going to get to the 20% operating income margin and some of it was cost, most of it was gross margin, but some of it was cost?

Yes. The One Ecolab lab program is about growth. And when we announced this in Q3 last year, there was a restructuring in the savings tied to it. But frankly, Steve, the restructurings are not why we're doing it. And the savings that we announced were about $140 million over the course of 3 years, which is about 1% of SG&A. So it's not super material in the scheme of things, and it's not why we're doing it. The One Ecolab program is about growth, right? How do we accelerate from the historical 4% sales that we've had over very long periods of time, to this 5% to 7% sales growth target, and we do this by focusing and accelerating the capture of this $55 billion cross-sell opportunity, which includes the digital component that you talked about before. But the cost savings are honestly coming from how do we take the functional processes, the end-to-end processes that we have to support the sales growth and make that more scalable because we do not want those functional processes to be an inhibitor to growth. And so how do we create great processes to enable that growth and free up time from our teams to focus on the highest value items.

In your examples, you showed for each of these various industries that you have a customer, you saved them $10 million a year or $15 million, whatever, does that just drive loyalty or do you -- are you a beneficiary of that cost savings?

Both. Certainly both. If we -- as we talk about the TVD, which I mentioned before, our total value delivered, is that's how we quantify the value we deliver to our customer, which -- since the pandemic inflation is something that we've always done and we implicitly did. But we're operationalizing the TVD in a way we never had before as we got this -- with the significant inflation, we got record high pricing and in order to keep that pricing as we always have, we've never had negative pricing in our history, but historically, have had 1% to 1.5% of pricing and now are getting to pricing of 2% to 3%, it's because we understand quantitatively that TVD in a way we never have before, right? And then being able to share in that where the customer -- the TVD relative to the pricing we're getting is at least 2x. So the customer is sharing in that value and then we are getting that pricing of 2% to 3%, which is enabled by that TVD delivery. And as you're delivering that value to customer and when we have TVD, it's just not us saying it's value we've delivered, that's the customer agreeing on the value that has been delivered.

This razor-razor blade model that you have, that would be in all of your technologies? It would be water treatment, is that a company that needs to pretreat the water going in or treat it during the process? Is that technology, that equipment, do you own that or does -- do they own that?

Yes, we do in virtually all cases. It's equipment -- proprietary equipment that we have. And we have this razor-razor blade. The razor in this is the anchor equipment. I mentioned in F&B earlier, the Clean in Place system is equipment that we have, that we lease to a customer and that's an F&B case. In an institutional space, like a restaurant, it would be the dishmachine which, again, we've continued to innovate with this DishIQ with the smart dishmachine. And then in an industrial plant where we're managing the water process is, this is the 3DT technology, where it's the technology and the dispensing equipment to dispense chemistry on a real-time basis.

Are you seeing an increase in your industrial customers not just from pretreating water that might enable them to access something that was not crystal clean to start with? They could use something that was industrial wastewater that they could then reduce their reliance on freshwater, but then also their discharges of wastewater. Are you seeing more and more scrutiny -- regulatory scrutiny that those discharges have to be -- have to meet even more stringent PFAS is what comes to mind?

Yes. We do not operate in PFAS per se, right? There's technology that we have, but it's not something we do. It tends to be in more of the municipal space, but it comes to water, there certainly is, as I talked about before, the growing -- the gap between fresh -- the demand and supply for fresh water is going to continue to be a problem. And in some of the areas of the world, it's already a significant problem. For in India, for example, where we had a very large customer that wanted to double the size of their operations, but the local government said they could, but couldn't use any more water. And so we figured out how to reduce their water consumption in their existing facility by 50% to allow them to add double the production, right? And so there are these demands in a lot of places as you think about place very high-growth areas in water like the global high-tech space, which for us is microelectronics and data centers or in other high water demand areas like food and beverage, where there is really a need to reduce the water, reuse the water and in some cases, use like microes ultrapure water. And this is this concept of water circularity. Minimizing the amount of discharge because waste water is really an engineering issue, right? It's an engineering failure, not being able to use as much water as possible.

Anybody who want to jump in with a question?

So I have this question on the resegmentation of the business. So in Q4, you guys came up with like the new divisional segmentation, so maybe can you explain a bit the rationale behind that? What does the company want to achieve here in terms of like helping the investor to understand the business case more or like is there any maybe M&A indication behind this as well?

Yes. We're always looking in our segmentation, generally aligns with how we operate. And the biggest change that we've made over the last year, which was combining our Healthcare business with our Institutional & Specialties segment. Historically, Healthcare was in the Healthcare and Life Sciences segment. But frankly, those are 2 very different businesses, right? They operate completely independently of each other really and one is obviously in hospitals, one is in pharmaceutical and bioprocessing. And so the health care business really after -- obviously, it's been a business for us that has not been very profitable. We've talked about it, is about how do we get the cost structure right. We sold the surgical business last year, which frankly was the highest margin business there, but strategically, didn't make sense, right, that -- with the connection to the infection prevention business. And that legacy infection prevention business there's 2 parts to it. It's really [indiscernible] processing, which is something that we want to invest in, in terms of anchor platform. But the environmental hygiene piece of it is the biggest part of it, which is very similar to what we do in hotels and restaurants, for example, in terms of the environmental hygiene. A lot of the same chemistries, which are regulated, are used both in hotels, restaurants and hospitals. So it's a very similar protocol. And in some cases, our institutional people were already showing up at the hospital, maybe working in the food service or the cafeteria of the hospital, but we're not involved in the environmental hygiene and that was in the health care business. So by pulling those field organizations together, there's definitely a synergy here. So that was the biggest change. And then we've talked about carving out our global high-tech business as a division within the Industrial segment. And really, as we have done for a very long time like we did for Life Sciences, where we identify high-growth, high-margin businesses that we want to fuel and focus on that we will carve them out as individual businesses, we did this several years ago with Life Science, which was largely part of the Food and Beverage division, but this was a market within that, that was high growth, high margin, and so we carved it out to focus, same thing that we're doing with global high-tech as now a division within the Industrial segment. Clear?

I'm just wondering if you could roughly segment out the $1.7 billion in the 2025 innovation pipeline? And then broadly, how much segment mix do you expect in the next -- or mix shift do you expect in the next 5 years?

Well, on the innovation, what I'd say there is that $1.7 billion, there's a number of programs that go behind this. Obviously, we've had a lot of businesses. But the big thing here is this shift, and you saw that proportion of how much is focused on product innovation in various businesses to this breakthrough innovation and that becoming a much bigger part of it. And those big programs that I talked before around water circularity in the global high-tech business, both microe and data centers and the life sciences, the new generation bioprocessing. So I would say in the DishIQ, which is the institutional, talking about the big programs for each business, DishIQ and ReadyDose solids, there are big programs with each of these segments because we're wanting to fuel growth in all of them. So I don't have a specific breakdown of the 1.7 by business. And then in terms of the overall mix, as we think about how we accelerate from that 4% growth to that 5% top line, it's getting after that $55 billion. But as part of that, it's also investing in these higher-growth businesses which we have in each of our segments. The bigger ones being the global high-tech, where this is a business right now that's a few hundred million dollars, but growing at double digits, which will certainly provide an advantage to the overall mix within Industrial because of a high-growth business. But then if you look at Life Sciences, which the total Life Sciences business is only about $700 million, again, a double-digit growth business, which will then become a bigger part of the mix. And from a margin profile, both of those businesses also have margins, OI margins above the corporate average and so you will also see a contribution there.

And maybe just one last one for you, Scott. Any areas for M&A? Any of your businesses, do you think there are some bolt-ons?

Yes. I mean bolt-ons are deals we love to do, Steve, because we really know the business, we can pull them in, they have great synergies, and in some cases, also bring interesting technology. Last year, for example, we did a bolt-on in water, a small regional water competitor, but also the head of technology. So we understand smart water management. It's a great return, very low risk from an M&A integration perspective, but they also brought a unique technology that we can take and scale across our operations. So that is an ideal bolt-on in my mind. We've did a couple of pest small acquisitions, regional competitors that we can integrate. So bolt-ons are great. We've done them very well for very long periods of time.

Very good. We're out of time. Please join me in thanking Scott for this presentation.

Thank you.