Ecolab Inc. (NYSE:ECL) Q2 2023 Earnings Call Transcript

Ecolab Inc. (NYSE:ECL) Q2 2023 Earnings Call Transcript August 1, 2023

Ecolab Inc. misses on earnings expectations. Reported EPS is $1.1 EPS, expectations were $1.21.

Operator: Greetings and welcome to the Ecolab Second Quarter 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Director of Investor Relations. Andy, you may now begin.

Andy Hedberg: Thank you, and hello, everyone. And welcome to Ecolab’s second 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 in the Risk Factors section in our most recent Form 10-K and in our poster materials.

We also refer you to the supplemental diluted earnings per share information in the release. With that, I’d like to turn the call over to Christophe Beck for his comments.

Christophe Beck: Thank you, Andy, and welcome to everyone. In Q2, our team delivered another very good quarter, building on continued strong momentum and once again making further improvements compared to the last quarter. Strong execution as well as easing inflationary pressure helped us get to the upper end of our expected Q2 earnings growth range. In an environment that remains unpredictable, our shift to offense continues to gain traction and our confidence in delivering midterm performance that’s ahead of historical average trends clearly keeps getting stronger. Organic sales growth remained strong at 9%, driven by the steady recovery of Institutional & Specialty with 13% organic growth. Pest Elimination and Industrial follow, delivering 11% and 9% organic growth, respectively.

Despite softening global end market demand, overall volume trends remain steady. In other good news, volume excluding Europe improved from flat in Q1 to 1% growth in Q2. So, volume trends are improving further, too. Adjusted earnings per share grew 13%, led by strong organic operating income growth that accelerated from 19% in the first quarter to 21% in the second. Although year-on-year comparisons are getting harder, pricing remained strong at 10% as further new pricing continued to grow. Delivered product costs were 5% higher than last year, but is sequentially a bit more than expected, which is further good news. We kept working on strengthening our performance, including targeted actions in Institutional, Life Sciences and Healthcare. Institutional had another remarkable quarter as it continued its very strong recovery, focused on new business and penetration, drove share gains in units served, solutions sold and sales delivered.

Growth, value pricing and productivity drove strong margin improvements, which we expect to continue in the second half. Additionally, innovation in labor automation positions Institutional as the ultimate leader in the market undergoing a foundational transformation, driven by evolving consumer habits and increased use of digital technology, all good news for us. Our highly attractive Life Sciences businesses was not immune to the short-term market pressure, which led to flattish sales. However, this is much better than competition. And Life Sciences growth potential remains extremely strong. Even if the short-term market transition takes a few quarters to get back to strong growth, we’re staying on offense. We’re taking this as an opportunity to gain share with major customers and to further invest in capacity and capabilities in biopharma and undisrupted pure water, even if it results in short-term operating income decline.

As promised, we’re also continuing our rapid transformation in Healthcare. In the first quarter, we announced a restructuring program to rightsize our cost structure. This is progressing well. Now, over the next few months, we will also be creating two separate, yet focused businesses from our North American Healthcare business, Surgical and Infection Prevention. Surgical, which provides protective drapes for surgeons, patients and equipment in operating rooms, will become a stand-alone business. Infection Prevention on the other hand, which provides environmental hygiene to reduce hospital-acquired infections, will leverage the critical mass of our North American Institutional field sales and service organization to expand customer reach and significantly improve productivity.

This is just a further step on our journey to transform Healthcare into a profitable business that serves hospital exceptionally well. While we continue to focus on margin improvement, which improved 130 basis points in Q2, we also accelerated our shift to offense. Our 1,100 corporate account managers achieved a record new business pipeline by leveraging enterprise opportunities to drive penetration and by focusing on new business prospects to expand our reach. Our more than 25,000 field sales associates sharpened their focus on exceptional service and deploying new business, which resulted in promising share gains. Our 1,200 scientists remain focused on breakthrough innovations, which enabled customers to achieve better outcomes at a lower total cost through reduced use of natural resources.

We’re also ramping up our investments in digital technology. With Ecolab 3D, one of the largest IoT cloud in the industry and our 1,000 digital experts, we’re uniquely positioned to further empower our field and customers to deliver best-in-class performance to unleash unique customer value, improved field productivity and deliver an exceptional customer experience. You’ll have the opportunity to experience some of this firsthand at our Investor Day in September. In summary, we delivered the second quarter exactly the way we wanted, with strong top- and bottom-line momentum despite the challenging environment. Looking ahead, we anticipate delivered product costs to remain high, but to ease progressively and for global demand to soften further.

Although none of this is new, the good news is that we are well positioned to win in this environment as our momentum keeps picking up. In the second half of the year, we expect volume growth to continue improving and gross margins to expand 150 to 200 basis points versus last year. During the last few years, our expertise grew as we maintained our team and rolled out new innovative solutions. Our retention rates remain high as we protected customers from supply shortages. Our margins continue to recover, and our organic operating income accelerated as we drove pricing in thoughtful ways, while increasing customer value. With this, we expect adjusted earnings growth in the third quarter to improve further and to reach 12% to 19% with continued strong momentum as we exit the year.

Finally, we’ll remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing our leverage and returning cash to shareholders, as we’ve always done. Most importantly, with the best team, science and capabilities in the industry, we will continue to grow our share of the high-quality $152 billion market we serve. In other words, our future has never looked brighter. I look forward to your questions.

Andy Hedberg: Thanks, Christophe. That concludes our formal remarks. As a final note, before we begin Q&A, as Christophe mentioned, we’ll be hosting our 2023 Investor Day at our Nalco Water headquarters in Naperville, Illinois on Thursday, September 14. If you’re interested in attending or have any questions, please contact my office. Operator, would you please begin the question-and-answer period?

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Q&A Session

Operator: [Operator Instructions] And our first question is from the line of Tim Mulrooney with William Blair.

Tim Mulrooney: Just one question for me today. You touched on this a little bit in your prepared remarks on the institutional margins, but I just wanted to dig in a little bit more. Because I noticed that your institutional margins, they were essentially flat year-over-year in the first quarter. It jumped up significantly in the second quarter, kind of showing progress to rebuilding back to those pre-pandemic margins. Can you just talk about what drove that inflection in the second quarter, why it happened now? And if you think that type of expansion is sustainable in the back half of this year? Thank you.

Christophe Beck: Thank you, Tim. Great question, because Institutional is our largest single business, as you know, in the Company, and they had a remarkable quarter in Q2, which followed a very good quarter in Q1 as well. So, I’ve been very impressed with how the team delivered once again. So, you mentioned it’s up 13% sales growth, 40% operating income growth. So, the team executed perfectly well. And what’s important is that our new model, which we announced a few years back now with focused sales and service organizations, one really focused on driving gains and the other one, servicing customers extremely well, while this new organization is working really, really well. That was the right move that we made a few years back.

So, we’re gaining share with new business. This business has a new business pipeline, which has reached record highs over the past few months, and they’ve done an excellent job at executing this new business. Pricing has been very good as well, which has been driven by the total value delivered that they’re delivering for customers that need it. So, more than ever, if I look at the unit share as well in the market with the number of units that went down, we’re quite stable versus 2019, which is remarkable. Penetration is up as well, with programs like Ecolab Science Certified that’s driving the usage of much more solutions than in the past as well in that business. And one other point, I mentioned it so many times. So since 2019, the foot traffic in full-service restaurants, dine-in traffic is down a third.

Our sales in that same segment in the U.S. is up 12%, so a massive share of gain that we’ve delivered here. So, we expect this momentum to continue in the quarters to come. And I even think that the OI dollars that we had in Q4 2019, well could be pretty close — closely delivered in Q4 this year as well, which means that we would be, in dollar terms, very close to where we were in 2019. And well, it’s only upside from here. So, institutions did really well. It’s driven by fundamentals of new business, of pricing, of productivity, of customer service, and I like a lot where we are and even more where we’re going.

Operator: Our next question is from the line of Ashish Sabadra with RBC Capital Markets.

Ashish Sabadra: So, pretty solid gross margin expansion in the quarter, and thanks for providing color on the gross margin expansion for the back half of the year as well. I was wondering if it’s possible to quantify what the delivered product cost was in the quarter. And there was obviously a comment on the delivered product cost to ease, but I was wondering if you could help quantify how we should think about those delivered product costs in the back half. Thanks.

Christophe Beck: Thank you, Ashish. I’ll pass that question to Scott, our CFO.