Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Thanks, everyone, for joining us at the next session here at Baird's Global Industrial Conference. I'm Andy Wittmann. I'm the senior analyst that covers facility services. And the next session here is with Ecolab. Obviously, we've got the company's Chairman and CEO, Christophe Beck, here. This one is going to be done as a formal presentation. And we also do have a breakout session after this. So if you do have Q&A, you can see us at that with a little bit more detail. So this is a stock that we've recently upgraded a couple of quarters ago. There's some really interesting growth areas of the company that we find pretty attractive. Certainly, there are opportunities in advanced technologies, are new and growing and relevant to the conference. It's obviously been a thematic thing. And we're seeing a little bit more price coming out of the company, which is also kind of new and different, and I'm sure Christophe is going to talk a lot about that during his remarks. So I'm going to leave it there, turn it over to Christophe, and we'll go from there.

Great. Thank you so much. Thank you, Andy, for having me. Thanks for joining us as well today. As mentioned, so I'm going to share with you the story of our company and we can have time for Q&A in a separate room afterwards. And we'll see, maybe we have a few minutes as well here. So always a pleasure to share the 102 years story of the company and still having that feeling that we're just getting started. So before get started, obviously, reminding you of the cautionary statement that we managed to have on just 1 page. I'm sure that you've all read it, especially since we're going to talk a little bit about the future or mostly about the future of our company. Because our company has been a great success story for a very long time; I'm the seventh CEO in 102 years, which is demonstrating the steadiness, the long-term focus of this company. It's a company that has been focused on growth and creating value long term for customers, for shareholders, for our teams and for our communities for a very long time, as mentioned before. It's a success story of delivering double-digit growth. 12% to 15% is our commitment year in and year out, and that's been the case for a very long time as most of you know as well. By driving steady top line growth; our sweet spot is this 3% to 4% that we've been delivering as well consistently. While we build high-margin, high-growth new engines for the future, and I'm going to talk about that. That's been true for this company for a very long time as well. We're in the business of building new businesses in new industries as well in the world that we serve. Which ultimately helps us to expand our margins towards 20%. We're 18% this year, getting towards the 20% by '27, and going beyond that, and I'll cover that as well in a second. And one of the core reasons why this company has been so successful for such a long time is because what we do matters and has mattered for a very long time. There will be 1/3 more people on the planet in the next 25 years, by 2050. We will need 56% more food. We will need almost 50% more energy. And we will need, by 2030 alone, 56% more water, that we don't have. And that's a problem. We can create new energy; we cannot create new water, as we know. We need to use it and recycle, and that's what we do for a living, which is essential as a company, which is at the core of who we are. We're the world's water and infection prevention company. We've been protecting people for a very long time, 1.7 billion people, of infection, protecting natural resources, while helping our customers around the world improve their operating performance. So it's a really win-win-win proposition for our customers, for our company and our shareholders and the communities that we serve as well around the world. And it's leading to a very good story that by doing good, we're doing well as well at the same time. We've been driving this double-digit earnings growth for a very long time. And that's been true, especially so during difficult times as well out there, which are obviously behind us. And even after 102 years, as mentioned, so we still have that feeling that we're just getting started, because we have unique capabilities, some we're talking this morning about the moat that Ecolab has. Because we have 48,000 people serving 3 million customers around the world in 40 different industries and 172 countries. We have 3,000 people in R&D and digital technology supporting those people. It's a critical mass that's really hard, obviously, to replicate. And when you think about the impact that we have as well around the world, as mentioned, we protected 1.7 billion people from infection last year, enough water for the drinking needs of 780 million people in 2024. And we protect 1/3 of the world food production and almost 1/4 of power that's generated as well. So what we do matters and has a big impact on all the customers that we're serving. We keep expanding as well the markets that we're serving. $165 billion is the total available market that we have out there. We keep growing it. We want to keep roughly 10% of the overall market that we're serving, which means 90% is up for grab. And we do it by adding businesses, like 20 years ago, Pest Elimination, which has become one of our best franchises. We've built our Water business to become the world's water company as well over time. We had the Life Science in 2017, and Global High-Tech in the last few years as well with data centers and microelectronics, which are big, high-growth businesses, as we know. What's interesting is that $60 billion of this available market is in customers we already have a connection with. In other words, it's a penetration play, which is a core element of our strategy. How do we capture more of this $60 billion of our customers that we are serving already today that could get even more of the services that we're providing? The breadth of our end markets and geographies is a real strength for this company because not every end market, not every geography out there will be facing challenges at the same time. So it drives a lot of resilience as a company, and that's why we have this steady top line growth kind of no matter what is happening around the world. And 90% of our revenue is consumables, it's typical razor, razor-blade type of business. And we work really hard to make sure that we focus 99% of our time on the blades, not on the razors, because this is the model that we've developed for a very long time. And it leads to very great performance, this 12% to 15% earnings per share, which has been our commitment for quite a while now, driving towards this 20% OI margin and, ultimately, reinvesting to accelerate the top line as well towards this 5% to 7%, which I believe should be the next steady state for this company. So let me unpack each of them quickly, so for you to understand, what are the mechanics behind them? And how does it work to deliver such performance? 3% to 4% for me is the steady growth. It's not the ultimate growth, as mentioned before. This is what we need to deliver 12% to 15% earnings growth while we invest in our new engines, that I will cover as well in a second. Obviously, as we move towards the 5% to 7%, it's going to help us drive, obviously, to 12% to 15% earnings growth and invest even more in our future. And we're very transparent, with the ones who are familiar with us, on how do we share the over-delivery between reinvesting in the business, providing that cash to shareholders or a combination of both as well. But the core is really driving this 12% to 15% while we keep investing in the business to accelerate the company. The good thing is, a little bit like the end markets and the geographies we serve, the good news is that we have a portfolio where we will never have a place where all the businesses are in the red. We won't have all the businesses in the green at the same time either, we know that. But 85% of the company is growing in a mid-single or mid-teens type of operating income growth, which is a very good place to be, with 20% of the company, you can see $3 billion, growing double digit with even better growth from an operating income perspective. And I'm going to come back to that because those are the key growth engines for the future, while we keep building our core business which are ultimately financing the future of the company as well at the same time. But what's key for us is how do we gain share in the markets we serve? Because not all are created equal, if we think data centers or if we think the Paper business, where it's not exactly the same dynamics that we have out there. So we're looking at our growth versus the industry growth. Keep in mind that we are in 172 countries, so it's not just U.S., which is our best market, by the way, as well, which is a good place to be. And we're gaining share almost in every market. And this is the way we measure our people and making sure that we are ahead of the market and competition in every market that we serve. So why that? Because especially in more difficult times, our promise, which is anchored in -- the first name of the company in 1923, Ecolab meant Economics Laboratory. It was an economic idea, not an ecological idea, just to remind a little bit the history here. Our promise to customer is better outcomes at a lower total cost because you're going to use less labor, less natural resources and create less waste. And we do it by bringing chemistry, technology, data science and local expertise anywhere in the 3 million locations that we're serving around the world. So our promise is to help our customers do more with less, improve their P&L. So we have this advantage that in more difficult times or a tougher cycle, whatever industry we serve, well, they need us even more. Because they need to improve their P&L in more difficult times, they buy more from us, which is one of the reasons that we can gain share in most of the markets that we're serving as well around the world. And we measure it in a very consistent way. We call it total value delivered. It's a combination of business outcome. It can be a guest satisfaction in a hotel, it can be an uptime in a data center, it can be an infection rate in a hospital, whatever is that industry-specific outcome that you're looking for. We add to it the cost improvement and we add to it the environmental impact, which is another word how much water, how much energy, how much waste could you optimize in the process. And you have a total dollar number or whatever you currency is. This is our promise at the local level and this is our promise at the enterprise level at the same time. This is the core metric of the company that we use in all industries, all locations around the world. And interestingly enough, if we do it for 3 million locations around the world, well, ultimately, we know which restaurant is the best restaurant out there, which one is the best data center, which one is the best brewing site out there, hospitals, you name it, because we do that in every industry, in every country around the world. We have a good knowledge of what best-in-class is in terms of performance, and we know how to deliver it because we have delivered it together with the customer. And that's a core element of our strategy, that when we talk to whoever in any industry, we serve mostly large customers, large companies, as you probably know, well, we can tell them, well, what's the best-in-class performance that you should be delivering in each of your locations? And our job together with them is to help them get all the locations within the company at the best-in-class performance. So we have the knowledge and the capability to deliver that for them anywhere around the world, which is a core element of our strategy. And at the end of the day, when we've delivered total value, delivered for our customer, we discuss about how do we share what's our share of it versus their share of it? And order of magnitude is usually they get 3 and we get 1, in what we call value price. So we get 1 value price, and they get 3. It's 25% for us and 75% for the customer, which is a very good story. And we've done that as well during tariff times, really making sure that our customers always get much more total value delivered than the increase that they pay for our own services as well, which is why the return is higher for our customers, they buy more from us, which is a good story, which allows us to invest even more in innovation in order to provide them even more value. Which brings me to innovation, which, as mentioned, is a core element of our company, 3,000 people in R&D and in digital technology around the world. We've been a digital technology for 30 years. It was called many times different ways, obviously, then we call it AI today. But that's feeding all the breakthrough innovations that we have around the world, we can help ultimately get to net-zero water data centers or we can reuse and recycle the water in a microchip fab, or we can have a system in a restaurant that allows anyone going to a Chick-fil-A and not having to wait too long in the line. So just in case you go into the drive-through, or you go down the line of all the innovation that we're bringing on the market, which all are focused on not having a new product, but delivering a new outcome for a restaurant, for a data center, for a fab or for any manufacturing site that we have out there. And last but not least, we focus our attention on large companies. We serve 80% of the Fortune 500 around the world and the local large companies as well. But every innovation, every focus on best-in-class, we start on our top 7 customers. We move towards our top 35 that are split in our top 20 and the ones that we call Emerging 15, the ones with the potential to get much bigger in the future, and our local 10 customers in every country around the world, which is roughly 100 customers in total like that. That's how we deploy our innovation. That's how we deploy our best technologies. And as we can see on that chart, our top 35 customers have a potential of $3.5 billion of growth potential, and it's accelerating growth as well, because of all the focus that we have on them and the innovation that we're providing them. The next part is investing in future growth. We have our core businesses, our hospitality that we call institutionals, our restaurants and hotels and retail stores. We have our Food & Beverage business, which is all the consumer goods companies around the world. This is core business for us. This is where I focus most of my attention. It's making sure those businesses keep getting better year in and year out. At the same time, it's making sure we're building the future. And we have 4 businesses that we are focusing on that represent roughly $3 billion of the company. I'm going to share with you each of those, so depending on how familiar you are with our company. The first one is Pest Intelligence; the second is Life Sciences; the third one is Global High-Tech; and the fourth one is Global Digital. And as you can see, good businesses, good-sized businesses, still small versus the size of our company, obviously. Serving big markets, high-growth markets, high-margin markets. And that's how we choose them, also aligned with the capabilities and technologies that we have that we can offer to those industries down the road. Let me take them one by one. So Pest Intelligence, which is always a bit of an interesting word. We're talking about the technology here, so not the pest that we're dealing with, obviously, that are really smart as well at the same time. But we're serving, okay, millions of devices around the world, so-called mousetraps, for the ones who are closer to that industry. The real truth is that 95% of the traps that we go and visit have absolutely nothing in there because the traps do not tell us yet where and what is in them, until Pest Intelligence came to life 2 years ago when the largest retailer on the planet embarked on that journey with us and said, we need to change the way we do it. On the one hand, I want to have 99% pest-free environment because this is a brand issue, it's a food safety issue and all the challenges that are related, obviously, to pests in any location out there. In the last 2 years, we've been developing with them a very unique technology that we've been leveraging from our Water business, where we have a few hundred thousand systems that are already connected, and we've leveraged that technology for our Pest Elimination business. And today, that retailer, part of it has been, 1 of the 2 brands that they have, so without going too much in detail, obviously, is fully covered with them. All the devices are connected. We're getting closer to 99% of pest-free environment, at 95% less effort to get there because we only go and check the devices where there is something or someone, or whatever is the right word, in that device. A great story, and we're expanding that across the country and around the world, which is a good example of how do we leverage a technology in other businesses into a business that didn't have much technology. And now it's becoming a purely AI-driven business, which who would have thought that pest elimination would become an AI business at some point? Great story, growing fast, high margin. And I think that we're differentiating ourselves in great ways with that business. Life Sciences is a new business, we created in 2017, was less than $100 million back then. So it's getting closer to $1 billion today. Where we help keep white rooms, clean rooms where drugs are being produced, super sterile, and at the same time, purify the drugs that are being produced as well in those environments. So you get this combination of perfect drug quality produced in the right environment, at the right cost, with the right environmental impact as well. A very good new story for us. High-Tech, a very interesting new field for us. It's 2 pillars. One is microelectronics, the fabs. It's really making sure that you can reuse and recycle water in a fab. Just for perspective, 1 fab uses roughly the equivalent of the drinking water of 17 million people. There are 500 fabs around the world, 100 are going to get built in the next 10 years. Well, there's a water problem there. And to reuse and recycle the water is a bigger problem because the quality of the water that's being used in a fab is ultra-pure water, 1000x more pure than the water you use in a drug that gets injected in your blood. So it's hard from a technology perspective. So it's a lot of water that you need to bring back at a super high level of standard that allows you to produce the next-generation chips as well. That's on the fab side. On the data center is really helping data centers use less energy to cool the data centers, that the energy can be used ultimately more for compute than for cooling, which has been a very good journey for us. Started 4 years ago, one of the new growth engines we have. And the last one, Ecolab Digital. For 30 years, we started with connected chemistry in 1991. The web didn't exist by then. And we've built that technology of measuring fluid properties in real time anywhere around the world. And now we have over 100,000 locations that are connected and a few hundred thousand devices that are connected to our cloud today. For 28 of the 30 years that we've been on digital technology, we did it for free, as part of everything we were doing for our customers. That has changed over the last few years where we start to put value, in other words, we monetize the services we provide to our customers in terms of digital technology. We're close to $400 million today, as you've seen in the third quarter, at very high margin. A very good story here for our customers and for our shareholders, obviously. And last but not least, AI has been a blessing for us, not just in terms of digital technology, but there's the whole infrastructure of data centers and microelectronics, as mentioned before. Well, that's driving business growth with the services that we're providing. At the same time, we're monetizing all the digital value, as mentioned before, that we're providing to our customers. We're leveraging One Ecolab, which is having all our processes run by agents, the last few years, has helped us save, well, $225 million in the next 2 years, as we've mentioned during Investor Day. A year ago, we thought it would be $140 million; we think it's going to be closer to $225 million today. And it keeps getting better. And we want to be -- I want to stay at the forefront of how we leverage and utilize AI technology in our operations everywhere around the world. And last but not least, we have so much data about the 3 million customers that we serve in those 40 industries, in 172 countries, that we want to provide to our customers to understand what best-in-class performance is and how to get there. So AI, a good story for us. Last but not least, margin. 20% has been our objective; 18% is where we are roughly. So this year, 2/3 of our businesses are already at or beyond 20%. So we know exactly how to get there. And the ones that are below, well, are usually because we're investing or overinvesting in those businesses, like Life Sciences, since we're building them for the future as well. And 20% is not the end of the story. It's 2027. And after that, we will keep moving between 100 and 150 basis points a year towards 2030. So you can do the math where we are expecting to be by 2030. Last but not least, really proud of the performance of the company, but also the strength of the balance sheet that we have, with a leverage lower than 2. It's a very good story, a great cash generation machine as well. Really making sure that our priorities remain really strong, and it's around dividends, it's acquisitions, investing in the business and share repurchase as well. Which we've done as well regularly, as you will see in a second, where we reinvest in the business continuously year in and year out as well at the same time. And as mentioned, we return as well cash to shareholders. Last 10 years, roughly $10 billion as well. We've done it for a long time and we'll keep doing it as well for a long time. Nothing changes. It's all part of our long-term model. So bottom line, a very good story that keeps getting better in good, like in less good times as well, while we focus on the core, making sure our business keeps getting better, delivers better value for our customers, while reducing the impact on the environment. We keep building as well the new engines for the future that are going to drive better margins, better earnings and better results for our customers and our shareholders. So in short, that was our story. And we even have a few minutes, Andy, if we want to get on a few questions.

Yes. I've got a couple here lined up. And I really wanted to start, one of your key businesses is the institutional business you referred to. In that, that's where you serve hotels, restaurants, like you said. The restaurant business has actually been pretty tough, but your results, I thought, in the quarter that you just reported were pretty strong and maybe suggested that you're kind of bucking some of the challenges there. What is it about the Ecolab model that has allowed you to give pretty steady performance in that business despite some tougher foot traffic trends? And can you just talk about some of the dynamics that are good for you or challenging for you in that business today?

Yes. Great question. So we've gone through all those industry cycles for a very long time. Obviously, as you've seen, so the industry is kind of flat, today. Foot traffic is flat to down. We're growing roughly 4%. Two reasons. Interestingly enough, so since we serve all end markets, so from quick serves, the McDonald's of that world, to the fine dining, depending on where consumers are going, we always capture them in a way. And you could see in the third quarter, our specialty business, which is QSR, so quick serve, grew 7% plus. It's been a great story there, while the core business was closer to 4%, which is still a very good story, around the world, not just in the U.S. In the U.S., it's even better actually, which is a really good story, at very high margin. Why that? It's in more difficult times, the industry needs even more help from us to reduce their total cost. They have a hard time to find labor. When they find labor, it's more expensive, as we know as well. The cost of goods are going up. Meat has doubled the last few years as we know as well. So they need to find ways to reduce their cost or optimize their performance. This is a perfect time for them to come to us and say, "How can you help me?" And the best-in-class approach, Andy, to help especially those chain restaurants understand what's the best-performing location they have in their enterprise, and bring all the other ones towards the best-in-class performance, resonates extremely well with them because it's a dollar promise at the end.

Great. And then just maybe the last question for me was on your Life Sciences business. I'd say this is one of the bigger opportunities in your company right now. The margin performance is in the mid-teens, but you have aspirations that are much higher than that. So my question is, what are those aspirations? If you could talk about what's going to help you get there. Do you need share gains or do the secular trends in the business lend itself to the kind of leverage that you need to get your margins up? So maybe if you could just talk about kind of what you see there. Obviously, we'd all love a time frame of what you're thinking about how long it takes you get you there. I think you're probably going to punt on that. But anything you could talk about kind of your plan there, I think, would be helpful.

I love that business. As mentioned, so we started 2017, less than $100 million. We're getting closer to $1 billion right now. There was an acquisition with Purolite in the biotech area that we did in '21. We're going to love that business. It's a high-growth business, high margin. The ambition is to get to 30% in terms of operating income. The underlying performance in terms of margins is in the mid-20s right now. We're building plants, we're building systems, we're building capabilities and capacities. So we know exactly how much we are over-investing as we're building that business. So the reported margin in the mid-teens is actually underlying mid-20s. That's why I feel pretty good to get towards the 30%. And part of that business is already north of 30% as well. So we know how to get there, we have the path pretty well laid out. But to your point, for me, it's to gain share. We are -- in most of the segments that we serve, we're the clear leader globally, even though we have 10% global market share of the markets we serve. In Life Science, we're kind of the third one out there, so behind some strong companies like Danaher and Thermo Fisher, just to name some of them. It's not a secret, obviously, there. We're much smaller than they are. We're very agile, very entrepreneurial, very innovative. So it's about gaining share in a market that's growing, that's generating very high margin. For me, it's the perfect combination of a market where Ecolab should be winning.

Great. Cool. I think we're going to leave it there. Then again, we'll see you in the breakout room that's located in the Chestnut Room. So we'll see you there if you have any follow-up questions. Thanks all very much.

Thank you so much.