Ecolab Inc. (NYSE:ECL) Q1 2024 Earnings Call Transcript

Ecolab Inc. (NYSE:ECL) Q1 2024 Earnings Call Transcript April 30, 2024

Ecolab Inc. reports earnings inline with expectations. Reported EPS is $1.34 EPS, expectations were $1.34. Ecolab Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Ecolab First Quarter 2024 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time, it’s now my pleasure to introduce your host Andy Hedberg, Vice President, Investor Relations for Ecolab. Mr. Hedberg, you may now begin your presentation.

Andy Hedberg: Thank you and hello everyone and welcome to Ecolab’s first quarter conference call. With me today are Christophe Beck, Ecolab’s Chairman and CEO and Scott Kirkland, our CFO. A discussion of our results along with our earnings release and the slides referencing the quarter results are available on Ecolab’s website at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which state that this teleconference and the associated supplemental materials include estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the Risk Factors section in our most recent Form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information and release. With that, I’d like to turn the call over to Christophe Beck for his comments.

Christophe Beck: Thank you so much Andy and welcome to everyone on the call. We’re really pleased to report that Ecolab is off to a strong start in 2024 with first quarter organic sales growth of 5% and organic operating income margin expansion of 400 basis points, driving adjusted earnings per share up 52%. We remain firmly on our long-term 12% to 15% earnings growth trajectory with our exceptional growth in the first quarter being the result of strong execution on fundamentals and the additional benefit of lower delivered product costs. This strong performance is a testament to the excellent dedication and execution of the entire Ecolab team and I’m so proud of this team. We’re encouraged by the current pace and momentum of our business.

Our efforts resulted in the delivery of 3% pricing, which included new pricing implemented during the quarter and a modest carryover benefit from last year’s pricing action and brought us slightly above our two percentage point plus long-term run rate. This delivery along with continued positive volume growth is possible because of our customer value proposition because of the value we provide the spend with Ecolab is a benefit and not a cost. This good top line growth combined with the anticipated easing of delivered product costs continued the strong organic operating income margin expansion across the majority of our business segments and geographical regions. We’re very pleased with the margin expansion we have delivered and remain focused on achieving our 20% operating income margin target over the next few years.

As we continue to execute against this target, gross margin is expected to continue on its positive trajectory. At the same time, we are now reinvesting some of these gains back into our business to fuel our long-term growth. Importantly, our underlying productivity remains strong and we see opportunities to further improve by leveraging our leading digital capabilities. Looking across our segments, Institutional Specialty continued to perform exceptionally well. This team delivered double-digit sales growth and a very attractive operating income margin as our labor savings value proposition continue to resonate with our customers. Going forward, we expect the rate of organic sales growth for Institutional Specialty to moderate somewhat as we lap last year’s strong pricing delivery.

Industrial made a good underlying progress improving its volume trajectory in a volatile global environment. Excluding continued soft near-term paper industry demand, industrials volume grew a nice improvement from the second half of last year. Health care and life sciences remained relatively flattish, but life sciences sales grew modestly which I consider constructive news given the continued short-term soft industry trends. We therefore expect trends to progressively improve during the second half of the year. As promised we continue to take the action needed to transform our health care business. A year ago we took the first step in our journey by adjusting our cost structure to a more competitive level. Then in the third quarter of last year we took our second step by bifurcating our North American health care business into two separate businesses Surgical and Infection Prevention.

Today we made further progress by announcing an agreement to sell our surgical drapes business to Midline. Once and if this transaction closes after regulatory clearance we will have a renewed focus on the instrument reprocessing portion of the remaining health care business. This business has the core elements of the classic Ecolab business model that combines an anchor platform with consumables personal service and digital solutions. What is more to be done? I’m proud of the progress we’ve made to create a more sustainable, profitable health care business that delivers for our important hospital customers. Finally, pest elimination, which is now a standalone segment due to its relevance and promising performance continued to execute very well.

Sales grew upper single digits with double-digit organic operating income growth benefiting from a circle the customer, circle the growth, cross-selling strategy. Looking ahead, the confidence we have in our 2024 performance continues to strengthen. We expect organic sales growth to remain relatively stable, driving 2% to 3% price and 1% to 2% volume growth. We are increasing our outlook for full year 2024 adjusted EPS to the range of $6.40 to $6.70, up 23% to 29% versus last year as we now anticipate delivered product costs to ease through the third quarter though the magnitude of cost favorability is expected to gradually diminish. This along with continued pricing and volume growth I expect it to more than offset the estimated $15 million per quarter OI headwind from the divestiture of our Surgical Healthcare business once the transaction closes.

As a result, we anticipate quarterly adjusted diluted earnings per share growth in the second half of 2024 to progressively normalize towards the upper end of Ecolab’s long-term 12% to 15% target a short-term benefit from lower delivered product costs ease. As always, we will remain good stewards of capital by continuing to invest in the business, increasing our dividend and returning cash to shareholders. With great business momentum and cash flows, our balance sheet is in a very strong position. This provides us with many options to allocate capital to growth opportunities that will generate continued strong returns for shareholders. Ecolab’s future has never looked brighter. Our leading customer value proposition where our technologies help customers improve their operating performance, while reducing the water and energy use is proving to be increasingly relevant and continues to fuel our growth, pricing and margin expansion.

Backed by the most talented team, leading technology innovation and global capabilities, our strategic positioning enables us to consistently expand our market share within the vast and high quality $152 billion market we serve. We, therefore, remain confident in delivering superior performance for our customers and for our shareholders for the years to come. Thank you for your continued support and investment in Ecolab. I look forward to your questions.

Andy Hedberg : Thanks, Christophe. That concludes our formal remarks. Operator, would you please begin the question-and-answer period?

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Q&A Session

Operator: Yes. Thank you. Now we’ll conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Tim Mulrooney : Christophe, good afternoon.

Christophe Beck : Good afternoon, Tim.

Tim Mulrooney : I wanted to ask about your growth investments. It sounds like you’re stepping up SG&A a little bit. So, I guess, my question is twofold. Number one, does this impact how you’re thinking about timing to achieve your 20% OI margin? I know a big chunk was gross margin expansion, but I also know to hit that target was a couple of hundred basis points of SG&A leverage. So how are you thinking about that 20% target now? And then secondly, on the investments themselves, can you talk a little bit more detail about what are — what parts of the business they’re going into? I know part of the reason that Ecolab has sustained its competitive advantage has been its willingness to invest in areas where others have cut costs. So I’m not saying it’s a bad effect of these investments, the way that 20% OI margin timing, but I was just curious what the strategy is around the step-up here? Thank you.

Christophe Beck: Thank you, Tim. Let me start with the second part of your question. We are in a great fortunate place, obviously, here where we have top line momentum, and we have margin expansion. And both are obviously feeding our opportunities to invest behind our teams, our technology and our future, which is exactly the place where we want to be on a continuous basis as well. Now as we accelerate our growth investment, at the same time, we’re also keeping a very close eye on our underlying productivity. And I like what I see. It’s important to have both that on one hand underlying productivity keeps getting better on a long-term basis and we’ve done a good job at that. And at the same time that we can invest when time is right for the growth for the future.

And regarding those investments that we’re making, it’s mostly behind three growth drivers, Tim. The first one is growth via power. We’re a machine that’s here to serve more customers to serve them more broadly and more deeply as well having more people serving those customers and supporting those people serving those customers will feed into our accelerated growth. The second part is digital and AI technology and services that we can sell. We’re making very good progress on that front, and I look forward to sharing more with you as we move forward and especially in 2025, because we see a lot of very good progress on that front serving our customers with digital technology with AI services and data that we can sell. And the third driver, our capabilities to serve as one Ecolab, where we can bring all the businesses together to serve one customer consistently everywhere around the world and that’s a unique opportunity for us to get that job done, as well as we speak and in the next few quarters.

And back to your first question related to the 20% OI target. Well with faster growth and further margin expansion, it’s making me more confident that we will get to this 20% margin in the next few years, as I’ve shared with you and we will keep informing you as well on the progress that we’re making on that path. But so far very good progress made.

Operator: Thank you. Our next question is from the line of Ashish Sabadra with RBC. Please proceed with your question.

Ashish Sabadra: Thanks for taking the question. Just on the DPC. I was wondering if you could elaborate how much was the DPC lower on a year-on-year basis but how it’s trending compared to pre-pandemic level, expectations for second quarter and rest of the year? Thanks.

Christophe Beck: Thank you, Ashish. I’ll pass that question to Scott, who will be best positioned to answer.

Scott Kirkland: Yes. Thanks, Christophe. Thanks, Ashish for the question. So as you know, we’ve talked about before we buy over 10,000 raw materials. So individually they’re moving in different places. But as we expected for Q1, in totality, DPC decreased in the upper single-digits and that was as we expected and as we guided to. And as Christophe said in his opening statement, as you talked about how we see it throughout the year, expect that DPC to continue to ease through the year but the magnitude of that favorability will diminish from Q1 to Q3. So going from this high single-digits to lower single-digits by Q3. And then to your last point about where we are versus pre-pandemic levels, commodity costs still remain as you’ve probably seen very high versus pre-inflationary levels or pre-pandemic levels. Thank you.

Operator: Our next question is from the line of Manav Patnaik with Barclays. Please proceed with your question.

Manav Patnaik: Thank you. Good afternoon. Christophe, I just wanted to – a bigger picture question on the components of the growth. So it sounds like from what you said the new kind of 2% to 3% pricing seems like that realization should be on track. And then I think a lot of the volume growth was kind of your own initiatives this quarter. So I just wanted to confirm those two and then just get your take on the third piece which is just the macro? Like what are the volumes in Europe and USA looking like without your kind of new business pipeline?

Christophe Beck: Thank you, Manav, good to hear you. A few things here. So maybe starting with the macro. I would say kind of unchanged. There’s a lot of puts and takes obviously, in all the 40 end markets that we serve. But – what we’ve seen in 2023 is what we’re seeing in 2024, overall. So feel good about the general macro at least with everything we know now. We know it’s an unpredictable world out there. But with everything we know I feel good about where we are and where we’re going. Then related to questions on pricing and volume. We feel increasingly good about our long-term pricing muscle, which you know is based always on what we call total value delivered, which are the savings we’re generating for our customers, which usually are at least two times the pricing that customers are giving us as well.

So it’s a very good win-win for both the customer and for us. So when we said two plus, now I’m saying for two to three and four for 2024, I feel very good about delivering that. And on the volume side, well, as you’ve seen, so from our Q4 to Q1. So volume has moved up overall as a company. So that’s a good indication, obviously, that our shift to offense that we started a year-ish ago, is really working well. Our new business is at record levels. We’re investing, as I’ve shared just before with team as well. So, behind our team, behind technology, behind capabilities, in order to sustain and accelerate that. So the volume is 1% to 2%. I feel really good about it as well, not every quarter is created equal. But generally, we should have a very good year in 2024.

Operator: Our next question is from the line of John Roberts with Mizuho. Please go ahead with your question.

John Roberts: Thanks, Christophe. A couple of quarters ago, you changed how you operate the health care business, now with the global surgical solutions being sold, are there still additional changes — structural changes that you’re going to make there?

Christophe Beck: Not much. There were four points on my plan, John, and I shared with you, you saw each step that we made when I could, obviously so do so. The first one was to really adjust the cost structure. We did that. The second was to create that bifurcation for infection prevention and surgical, which happened very well in the latter part of last year and now so the pending sale of our Surgical Solutions business to Medline, that step three. It’s been a great transaction. So was a great partner. I feel really good with where we are and hope to close as quickly as we can on this one. And then there is the point four. And the point four is to build our infection prevention business around a typical Ecolab style type of business, which means with a machine, with consumables service, with digital technology.

And that’s the instrument and endoscope reprocessing business that we have as part of infection prevention today that we want to keep building in the years to come because it’s a winning market. It’s a market where we have all the rights to win, typical model for Ecolab as well, and we know exactly how to run a business that way. So it’s the right focus, it’s the right team. We will keep adjusting, obviously, so how we evolve that business. We will be building that business over the years to come. There will be internal innovation. There might be some small acquisition as well as to it, nothing dramatic. I want to build a great health care business in the years to come. It’s going to take some time. It’s never easy, but we’re going to get to the right place as we’ve always done with our previous new businesses in the company.

Operator: Our next question comes from the line of Josh Spector with UBS. Please proceed with your question.

Josh Spector: Yeah. Hi. Good afternoon. I wanted to ask a couple of related things around institutional and specialty. So first, congrats, really strong performance in the quarter, I think we know the optics of pricing coming down. But if we say pricing in the segment was anywhere near the ballpark in the total company, it looks like volumes were up high single digits. And it’s a pretty meaningful step-up on year-over-year and multiyear stack. So the question is really, is that momentum that you think can be maintained? Is that the new wins flowing through and you could deliver call it, mid- to high single-digit volumes on institutional through this year? And the second part is more around margins and that typically is a pretty meaningful step-up in that second, first quarter to fourth quarter, call it, 400 to 500 basis points any reason why we shouldn’t see that in that framework for this year?

Christophe Beck: Thank you, Josh, especially for nice comments. So the team has done an unbelievable work in the last quarter, like in the many prior to that as well. So, back to your question on institutional and specialty, this business has been now for quite a while on a great path. As I’ve shared with you, very openly, the pandemic has been game changing for this business, and I mean that in a very positive way. Generally, the industry is doing quite well people have enjoyed going back to hotels, restaurants and travel. People have been open to pay more. And it’s an industry that, at the same time have been able to reduce their cost, because they had a hard time as well to get all the staffing that they were looking for.

That meant better margin for them, better traffic for them as well. Overall an industry that is in a much, much better place than it used to be as well. Well, we’ve taken that opportunity to also improve our business in a dramatic manner in North America like everywhere else around the world, and I absolutely love what this institutional team has done around the world, because we’ve been able to align with exactly what the customer’s needed, short term when they were reopening midterm now where they need, so solutions in order to serve the increased traffic that they see. And most importantly, they need to reduce their labor cost. Well, that’s exactly what we help them do with all our automation solution, it can be software, it can be training, it can be chemistry, it can be technology, you will see that at the National Restaurant Association Show as well in a month from now, very good stuff happening, which is driving all the growth of that business and the willingness for customers to pay more for those solutions because as always they get more value than the price that they’re paying ultimately so for us.

So to your question on the long-term trajectory for institutional, I think that this five to seven that we’ve talked about for the company should be the swim lane for institutional as well long-term. And there will be times where they will be better than that and sometimes they might be a little bit on the lower end. I think that this year they’re going to have a very good year and institutional and if it continues that way while it’s going to line up with what I just said in terms of long-term trajectory. For the margin, they’re in a very good place right now. They’re expanding so quicker than we had expected as well with volume that’s a bit lower than where it used to be pre-pandemic. Well, that’s basically demonstrating that the institutional P&L is much better than it used to be.

As volume will recover the margins will keep improving as well. And the P&L of that business will keep getting better. So that’s a typical business that’s going to be north of 20% pretty quickly. And we’ll keep growing from there, because it’s in a great position to do so. All-in-all, a great business with a great future.

Operator: Our next question is from the line of Chris Parkinson with Wolfe Research. Please proceed with your question.

Chris Parkinson: Great. Good afternoon. On the global Pest Elimination business, you’re offering a little bit more detail and we’ve been hearing about the business for a while. But can you just offer a little bit more color on how you’re thinking about that business strategically? Is this simply just, hey it’s a great institutional service-driven pricing as business? Is this more of a roll-up should be emphasizing, I think the old terminology was enterprise selling across your institutional clients? Just if you could offer a little bit more insights on how we should be modeling that and your thought process that would be very helpful? Thank you.

Christophe Beck: Thank you Chris. I’ve never personally worked in the Pest Elimination business, but I love that business. It’s unbelievable the performance that it delivered in the best of times like in the most difficult times as we’ve seen as well over the past few years. Steady high-growth, high OI growth business, great margin and great future. And maybe a few points here. The first one they’ve reached the threshold of $1 billion sales in 2023. For me that was the moment to separate that business and to have it report directly to Darrell Brown, our Chief Operating Officer because it’s a business where we want to have all the focus, all the attention, all the investment that we can get as well behind it because it’s high growth, high margin, high return.

So that what we’ve done internally from a management operating perspective that led directly obviously to how we report as well that business and wanted to make sure that our segment reporting was perfectly aligned with the way we manage, as well the company at the same time. And on a side note it helps you as investors, obviously, to see in full transparency how this business is performing and how it’s operating as well at the same time. And you’re going to see that it’s maybe not the biggest best elimination business on the planet, but it’s the best performing one, highest growth, highest margin, which is a pretty cool place to be. Now, on how we’re going to keep driving that business for the future it’s going to be first and foremost internal.

So, organic. We have a great team. And especially on the technology side, as you’ve seen during Investor Day and we’ll see so going forward as well, we’re leveraging all the digital capabilities of our company. And keep in mind that we have in Industrial, for instance, hundred, thousand devices that are connected today. We have over thousand people in digital technology that have been working for years as well behind all the capability build that we have today. While we’re going to leverage all that in our best elimination business to ultimately really transform that business into a digital business. To the question of M&A, can’t make big comments on that but we will keep doing some small bolt-ons as we’ve done in the past because we know how to do it.

It works really well. So, every time we will find good companies that we can add to our Pest Elimination franchise, we will do so. So, a great story that keeps getting better and will get better in the years to come.

Operator: Next question comes from the line of John McNulty with BMO Capital Markets. Please proceed with your question.

John McNulty: Yes, thanks for taking my question Christophe. So, just wanted a little bit more clarity on the Life Sciences business. I know it’s struggled a bit but it does seem like it’s finally starting to pick up a little bit of momentum. Can you flesh that out for us in terms of what you’re seeing and maybe how that pipeline is filling out as we kind of look to the back half of this year?

Christophe Beck: It’s a good story John. We know that building new growth platforms is hard, it takes time, but we’ve done it many times. Pest Elimination that we just discussed was a perfect example that we did sort of years back as well. Life Sciences is one of the newest one that we have. And if you look at just the results in Q1, the fact that Life Sciences is growing in a market that’s currently down double-digit, is showing how performing that business is and how interested our customers are in what we can offer. So, I like where we are versus the market and I know that that market is going to recover. Is it mid this year second half of this year, early next year, from a market perspective? I don’t know. I can’t influence that, but I can influence how we serve our customers, how we generate new business, and I like a lot what I’m seeing here.