Ecolab Inc. ($ECL)

Okay. We're good to go. We're going to get started here. Thank you, everyone, for joining us today with Ecolab. My name is Tim Mulrooney. I'm the analyst here that covers Ecolab. And I'm required to inform you that for a complete list of research disclosures and conflicts of interest, please visit our website at williamblair.com. So I'm really excited to have Ecolab here today. This has been a company that's been a fun one to follow, particularly recently. There's been a lot of news out about the company, and we recently added Ecolab to our current better values list last month with the thesis being basically [indiscernible] energy costs, which have driven the stock price down, actually isn't going to [indiscernible] impact that you'd normally see at Ecolab. Of course, I know it's famous last words to say this time is different, but we're saying this time is different. And so that was part of it. And other part was an expectation and acceleration of volumes next year, some of these higher-growth businesses get folded into their business. So hopefully, Scott you don't say anything today that contradict anything I put in the current better values right up. I don't know. But that was basically what we were saying and are very excited to enteritis between the stock price and what we view as the fundamentals. So with that, I'm going to pass it over to -- we're very pleased to have Scott Kirkland here, the CFO; and Andrew Hedberg, the Head of IR. Thank you guys for coming today. And I'll pass it over to you for some opening remarks, and then we can hop into Q&A.

Great. Thank you, Tim. Appreciate the introduction. Good morning to everybody. It's great to be here with you today. Sure with you, especially those new to the story, Ecolab's story, but also about how our model is delivering really good performance today, very strong performance. but positioning for us for even better performance in the future. But before we get started, I'd ask you to read the cautionary statement. I won't read it verbatim, but please read it. And with that, I will move on to the funds. So for those new to the Ecolab story, Ecolab is a global leader in water, hygiene and infection prevention, protecting people and resources vital to life. Our strong performance comes from pairing that mission with a disciplined business model. What we do matters for our customers and it helps them improve their performance and profitability. We apply this model across more than 40 industries, driving consistent growth margin expansion and strong earnings performance, strengthened further by our growth engine, I'll talk about a little bit, which are scaling at double-digit rates with very attractive margins. All of this is supported by a very clear financial framework, including strong free cash flows, a disciplined approach to capital allocation and a balance sheet that provides us flexibility to invest through a variety of economic environments. And we have the means to achieve our ambitions with unmatched capabilities and reach. We have 48,000 associates serving customers in more than 170 countries supported by deep scientific and digital expertise. Ecolab is a trusted and innovative partner at millions of customer locations, some of the biggest brands in those industries. In 2025, we protected 1.7 billion people from infection. We protected 1/3 of the food production and 1/4 of the power generated. The ability to deliver those outcomes is through a very simple but powerful model. We deploy on-site experts at every customer site who understand how those customers operate. We then apply chemistry technology, data and digital tools to the performance and reliability at our customer sites. The result is a best-in-class performance outcome at the lowest total cost through reduced water, energy and waste. And because the value we deliver far exceeds the cost of our solutions to our customers, the customers see clear economic returns in what we do for them. That's what we mean by total value delivered, which is a foundation of growth. And that value proposition creates a very resilient model. More than 90% of our revenue comes from consumable products that are mission-critical to our customers, that drives predictability and durability in our business. We also benefit from very broad industry diversification, both industries and geographies, which helps balance performance through different economic environments and reinforces that stability of our growth. That stable foundation supports the strong and consistent financial performance and our long-term growth algorithm is clear. We target 12% to 15% of adjusted EPS growth every year through disciplined execution and balanced capital deployment. We're on track to reach a 20% operating income margin by 2027, driven by value pricing, innovation, high-margin growth engines and productivity. And as our growth engine scales, we see a clear path to accelerating organic sales growth into that 5% to 7% long-term range. I know recent macro volatility, as Tim talked about, and the energy inflation is top of mind for many investors. We see that environment as manageable with the pricing and supply chain actions that we've taken in our history of performance. Our exposure to raw materials derived from oil and gas is about 6% of our total sales. Exposure will only decrease as our growth engines accelerate, as they have a much smaller reliance on oil and gas based raw materials. And the inflation environment this year is also very different than 2022 when our commodity costs increased nearly 50%. Looking at the current environment and assuming that our energy costs remain high through the balance of the year, our commodity costs are set to increase this year by about 9%. But we continue to expect to deliver 12% to 15% EPS growth this year, excluding the short-term impact of the pending CoolIT acquisition, which I'll talk about in a bit. And we're doing that as our pricing continues to strengthen with the implementation of our energy surcharge, which we launched in April. You can see that pricing acceleration we're driving through the second quarter and the slide here. And while higher commodity costs have been a headwind, pricing is quickly building during the second quarter. And in the second half of this year, we expect organic sales growth to accelerate to 6% to 7% and with pricing roughly 2x the inflationary headwinds, helping to quickly stabilize gross margins. In other words, we'll be fully offsetting the impact of commodity costs and earnings and margins in just a few quarters. The pricing discipline isn't a new thing for Ecolab. We have a long history of keeping and growing pricing every year. Because our pricing is back, as I mentioned before, by incremental value our solutions create for our customers. Since 2021, our solutions have delivered a cumulative value to customers of more than $11 billion. And we've captured a meaningful share of that through pricing, as you can see here. This is a durable advantage that supports both the growth and margin expansion of our business. Turning to near-term performance. With good business momentum and accelerating pricing overcoming in the commodity cost inflation, as I mentioned, we expect strong second quarter with organic sales growth of at least 4%, stable organic gross margins, excluding the impact of the Ovivo acquisition and adjusted EPS growth of 9% to 12% in the second quarter, which is stronger than our initial guidance for Q2. And we expect this momentum will continue into the second half as organic sales growth accelerates to 6% to 7%, and our organic gross margin expands 75 basis points. And with that, our adjusted EPS of 14% to 15% before the impact of CoolIT, which I'll talk about in a moment. As I mentioned, the second half of '26, we expect that underlying performance to reach the upper end of our range without the impact of CoolIT amortization and financing costs. Including the impact of CoolIT and amortization and financing costs. Adjusted EPS is expected to grow 4% to 5% when the CoolIT deal closes. Looking beyond this year, including CoolIT and the roll-off of the Nalco amortization, we expect our 12% to 15% EPS growth trajectory to only strengthen, as I mentioned, with a clear path to the 5% to 7% organic sales growth and expanding ROI margins to and beyond the 20% target we have for 2027. We've built a portfolio that's both resilient and positioned for faster growth. Our growth engines are scaling quickly. I'll talk more about those in a second and represent roughly 1/4 of the business. Our core businesses are also performing well, delivering steady mid-single-digit growth with strong and expanding margins. As 2026 progresses, we expect continued growth improvement in paper and heavy water as we drive good share gains and mitigate softer market demand. And our growth engines are compounding. With those compounding, the core business is performing well and our more challenges business is stabilizing, we will grow faster and with strong margin expansion. Our largest core business is institutional specialty is performing very well, delivering mid-single-digit growth with good margin expansion. This strong performance is fueled by breakthrough technology platforms like DISHIQ, AquaIQ, which helped food service and hospitality customers improve guest satisfaction while using less labor and significantly reducing their operating costs. We are expanding from anchor innovation like into digital solutions like KitchenIQ, which is our proprietary digital platform that helps food service customers streamline back-of-the-house workflows, enhance food safety management and ultimately optimize labor. And we're tying it all together with our One Ecolab growth model, where we can drive best-in-class performance across our customers' locations, unlocking [indiscernible] for them and growth for Ecolab. All of this translates into a strong performance for our institutional specialty segment, growing mid-single digits despite fairly stable markets, and we expect sales growth for this segment to accelerate to the 4% to 6% range in 2026 with strong and expanding margins. The same model and performance shows up in food and beverage. Another one of our core businesses that is outperforming in the markets. We are bringing together new technologies like enzymatic cleaners that deliver better, faster cleaning outcomes for customers. and a more attractive growth and margin profile for Ecolab as we innovate to provide alternatives to volatile raw materials like caustic. And we're leveraging this new innovation with digital solutions like Ecolab CIP IQ, which provides real-time proof of clean with our leading water technologies, the Food and Beverage business brings a One Ecolab integrated water and hygiene program to customers to drive that best-in-class performance at customer locations. And as a result, food and beverage continues to grow well ahead of its end markets. We expect growth for food and beverage to accelerate to 6% to 8% in 2026, again, with strong and expanding margins. Beyond our core businesses, our growth engines are an increasingly important part of our story. Pest, life sciences, digital, global high-tech represent about 1/4 of the company today and are growing faster than the enterprise with margins accretive to Ecolab. We're investing in each of them with purpose, both organically and inorganically. In pest, we're performing within our long-term sales target and have a long runway as we scale our pest intelligence platform. which fundamentally changes the service -- how the service model works. Today, 95% of our time is spent checking empty traps. With pest intelligence, we flipped that spending 95% of our time solving customer problems. We'll know exactly where the pest activity is happening and the service where it counts the most. For customers, we're able to deliver nearly 90% pest-free locations versus industry average in the low 90s. This creates a significantly better experience for our customers while reducing the high cost and brand damage with large-scale pest issues. This means more value for our customers, and more growth and higher margins for Ecolab. Life Science follows a similar pattern. Through One Ecolab, we're bringing together drug purification technologies, cleaning and sanitation solutions, digital and water purification. This unique solution set allows our customers produce the highest quality drugs at lowest total cost. We have been investing in this large and expanding market, and you're seeing that show up in strong performance. Organic sales are growing double digits with our biopharma business doubling its sales in the first quarter. Growth for Life Sciences is expected to further accelerate during 2026, driving strong double-digit OI growth on our path to our 20% 30% OI margin target. And as we leverage significant investments we've made in this business, this will drive high growth and continued high margins in this business on the path to 30% OI margin. AI is an important part of the Ecolab growth strategy with our global high-tech business that spans fabs and data centers. As you've probably heard, AI demand is reshaping digital infrastructure and AI compute is expected to roughly double over the next 3 to 4 years. Industry plans call for about 50 gigawatts of incremental compute demand. That's driving roughly 70 new fabs and 1,000 new data centers over the next few years. For us, that represents a $10 billion opportunity for our global high-tech business that's growing -- already growing extremely fast with accretive margins to Ecolab. And as the world's water technology and services company, we are well positioned to capture this high-growth high-margin opportunity. Water sits at the critical step, every critical step of AI. You need ultrapure water to produce the chips. You need water to generate the electricity that powers those chips and you need water to cool the chips in data centers. On the microelectronic side, we partner with fabs to deliver ultrapure water and water circular programs, strengthened by our recent Ovivo acquisition, allowing customers to produce more chips with less water. In data centers, we combine Ecolab's water treatment, cooling liquids, [indiscernible] their tracer monitoring and our latest cooling as a service offering with CoolIT's direct-to-Chip, liquid cooling technologies, and together, we'll deliver more computing with less cooling through a single integrated direct-to chip model that improves reliability, efficiency and uptime. So together with Ovivo and our pending acquisition of CoolIT, Global High Tech will be our largest and fastest-growing growth engine with $1.5 billion in sales, the business is growing above 20% in a large and rapidly growing market. The business meaningfully accelerates our growth algorithm. Global high-tech alone will accelerate sales growth by 200 basis points with a very attractive margin profile. Putting this all together, we see a clear pathway to accelerate Ecolab's organic sales from the 3% to 4% last year to 5% to 6% in 2026 and 5% to 7% in next year. Within this, we expect our core businesses to contribute 3% to 4% to our total growth and for our growth engines to add another 2% to 3% growth. Our stronger top line trajectory helps to further expand our operating margins. Within our portfolio, about 2/3 of our businesses are already at or above our 2027 OI margin target of 20%. 1/3 of our businesses are below the 20%, including life sciences and global high tech, 2 businesses where we are investing for the future and underlying operating margins are already north of 20%. We've been driving -- delivering strong margin expansion for a long time. with OI margins up 600 basis points since 2022, we exited 2025 with a record 18% OI income margin with value pricing well ahead of DPC inflation, accelerating growth engines and One Ecolab enabled productivity, we're confident in reaching our 20% OI margin target by 2027. But 20% is not the destination. Beyond 2027, we're targeting 100 to 150 basis points of annual OI margin accretion through 2030. All of this is guided by our disciplined financial framework, I referenced before. strong organic sales growth and continuing to deliver adjusted EPS growth of 12%, 15%, a strong cash generation model, targeting free cash flow conversion of 90% to 100%, which supports rapidly deleveraging and strong liquidity. We'll continue to focus on our fortress balance sheet with disciplined capital allocation, providing us the financial flexibility to invest through the cycle. And that discipline translates directly into strong shareholder returns. Over the past decade, we've returned more than $10 billion to shareholders and increased our dividends for more than 3 decades. Ecolab is a high-quality compounder with a durable recurring cash flow, established market leadership and accelerated growth driven by AI infrastructure. We expect gross margins to stabilize as we exit Q2, our core businesses are outperforming their and expanding their margins and our growth engines are compounding at double-digit rates with margins accretive to the company. All of this reinforces our confidence in delivering strong financial performance in 2026 and well beyond. Thank you for listening.

Thanks. Scott, that was a great overview. There's a lot to be excited about here. And we got about 20 or 10 minutes left before we go to the breakout. By the way, the breakout room is in the Adler room for those that are interested in exploring some of these topics in more detail. I'm going to ask a couple of questions, and then I can open it up to you all, but I want to start it out with the guide. I think that's new news. Today so you raised it, you were looking for EPS growth of 7% to 12% and you raised the low end to 9% to 12%. Could you just talk about what drove that increase specifically?

Yes, good question. So as we exited Q1 and we talked about Q2 as this transition quarter, that we are launching our energy surcharge with the raw material inflation, not understand exactly how that pacing would be, but feeling very confident about the second half, but the pacing in the second quarter was hard to predict. But now as we're more than 50% through the second quarter and have very visibility have great confidence in that delivery, and that's why we changed the original guidance from this 7% to 12% to the 9% to 12% and brought up the bottom of the range.

Got it. So it was execution on the energy surcharge is going better than expected.

I wouldn't say better than expected. Within our range, but it's just given us -- going very well. .

It's not because some geography is doing better than you thought or some businesses performed better than you thought.

Well, all of the businesses are continuing to perform very well, right? As we exited Q1, business is performing well. That's continuing. And then on top of that, also executing, as you said, very well in the energy surcharge, and that's going very well, giving us the confidence to both say the minimum on sales is that 4% and so we feel that as the bottom on sales, but also that the bottom and the EPS range is now 9% so that 9% to 12%. So just great confidence given the execution and visibility we have into the second quarter, but also that confidence now as we exit the second quarter, that this underlying excluding the impact of CoolIT once it closes, but excluding CoolIT, that the second half EPS will be this 14% to 15% and top line is 6% to 7%, inclusive of 5% to 6% of pricing because of the energy surcharge implementation and the path we're seeing in Q2.

That 6% to 7% organic growth is for the second half is for the second half.

For the second half, right.

And I think that might be a little bit higher than my model. I have to go back to check, but it seems like all is going according to plan, which is why Christophe said on the first quarter call, by the way, like this isn't where his focus is, right? Like he's obviously focused, but he's like, this isn't where he's...

This is his highest priority. Because of the confidence that we have, and we've seen this movie before. right? So 4 years ago, we had a surcharge in the second quarter and learned a lot from it, executed really well and exited that cycle, as you recall, with higher margins. We've had record margins at 18% in the last year and showed great discipline and execution to be able to do this. and built strong muscles from 4 years ago that we're flexing even now.

Yes. Okay. So this time is different, in fact.

Yes, as you think about the quarters because we're talking about the organic gross margin, excluding the impact of Ovivo because there's some P&L geography from that. So the organic gross margin, we expect to be up 75 basis points in the second half. So we're doing what used to take us a few quarters in doing basically in 1 quarter.

I remember Mike Monahan would be coming to these conferences when there'd be a dislocation or a surge in energy cost. And he's -- the old saying was it takes 4 quarters to build back the gross dollars, and then 4 more quarters to go back to margin. You are, in essence, building back all of the dollars in 1 quarter and your margin will be expanding in the second half of this year. So you've compressed the cycle.

We've taken the approach to TBD, the muscle that we built 4 years ago and made that a discipline, and creative scale and efficiency in doing that and efficacy because we better understand the value that we deliver more than ever, and we're able to get that pricing, improve that value to customers.

Got it. Okay. The only other question that I wanted to ask before I open it up is really around CoolIT because the headline number on CoolIT is that you spent 29x EBITDA to acquire this company. But I'd also note that you implied in that next 12 months outlook was 30% growth. And please correct me if I'm wrong on any of this.

And we said 30%, and that was over the first 3, 4, 5 years, right? And so the early years would be higher, just obviously given the loss small numbers. And so we said 30% over the first few years. And so that's a CAGR. Obviously, in the first year, we expect that to grow fast.

Okay, because that was basically my question is I think it grew over 100% in the first quarter. Is it growing faster than what you expected when you first started diligencing this thing?

It's doing really well. We don't own it yet, so I'm always cautious with assets here yet known, and we only have limited visibility, but it is doing very well. And so we're always very disciplined about our approach to investing both organically and inorganically. And I think we always take a prudent view of it -- of these deals. And so it is performing very well from everything we can see. And as we talked about in the first quarter, yes, it basically grew 100%. So it's going to go much faster than 30%, but that was over the next 4- or 5-year time line. And so this year and into next year, which is the reason we've talked about this 200 basis points combined from Ovivo and CoolIT that they're going to add on a pro forma basis if you will. But once that annualizes that will provide a 200 basis point benefit to our top line, which is why we see this, as I said, this very clear path from this historical 3% to 4% and how do we get that 5% to 7% and that is going to be driven by our growth engine certainly in the short term, we're going to benefit from the energy surcharge. But even as that energy surcharge annualizes in the first half of next year, we see that path to that 5% to 7% because of the benefit of the growth engines, including CoolIT.

So it would be -- the growth algorithm for next year would look a little bit differently as you break it down between price and volume.

Yes. So I think so. I think there will probably be more price in the first half naturally because you'll see the -- right now, we're this 2% to 3% pricing in the first quarter, right. That's accelerating, and we're expecting pricing total in surcharge of 5% to 6% in the second half. So you'll have some natural annualization in the first half. But then that angulation will then -- that will happen in the first half as the CoolIT deal hopefully annualizes as well and then you'll see the organic, including the benefit from CoolIT in the second half.

Got it. Okay. Very clear. I appreciate that.

But obviously, the reported number will be even better because it will include both the benefit from the higher pricing and the benefit from CoolIT on a reported sales basis. So I'm talking organic.

Okay. Got it. Yes. Got it. On the organic basis. Okay. A couple of minutes left. If we have any questions in the crowd, for Scott, otherwise, we can wrap it up early. But any questions -- burning questions? Okay. I think we'll leave it -- yes, we got one over here. Sir?

Can you talk a little bit about the data center buildout of how maybe the maraging place states how does that impact you for CoolIT and the growth rates you're expecting?

And would you repeat the question just because I think this is being webcast.

Yes, there was a question on how moratoriums in certain states and data centers, may affect the growth of CoolIT. Well, the growth of CoolIT is going to be correlated to what's happening from a chip perspective as much as it is from a CapEx perspective. And I don't think what's happening in the data center build-out, whether -- and our data center slows, is going to slow down the innovation happening from an AI perspective and the chips being designed for AI. And because that will change the cooling needs, whether it's from the cold plates or the CDUs that's where the growth in pen so we believe the growth is going to continue, and we don't have concerns around that growth because of what's happening in the AI and the chip space.

Okay. Thank you all, and we'll see you in the Adler room. Thank you, Scott.

Thank you.