Ecolab Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2021

There are 16 speakers on the call.

Operator

Greetings, and welcome to the Ecolab Third Quarter 20 21 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Monahan, Senior VP, External Relations for Ecolab.

Operator

Thank you, Mr. Monahan. You may begin.

Speaker 1

Thank you. Hello, everyone, and welcome to Ecolab's Q3 conference call. With me today are Christophe Beck, Ecolab's CEO and Dan Schmeichel, our CFO. A discussion of our results along with our earnings release and the slides referencing the quarter's results are available on Ecolab's website atecolab.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.

Speaker 1

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 ks and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. Starting with a brief overview, strong third quarter results More than offset significantly increased delivered product and other costs. Looking ahead to the Q4, we expect both accelerating sales volume and Pricing momentum to leverage an expected continuing though uneven global recovery.

Speaker 1

We expect these drivers to result in the 4th quarter showing better year on year Sales growth in the 3rd quarter. We have also experienced continued substantial delivered product and other cost inflation that we believe will increase 4th quarter costs by nearly $0.20 per share. As a result, we expect 4th quarter earnings to grow double digits, though not as strong as the Q3. We expect to once again successfully manage the current inflation challenges and uneven global economic recovery To deliver very strong sales and earnings growth in 2021, as the strong volume and pricing gains, along with productivity and cost reduction actions, Enable us to offset the higher costs and yield double digit earnings growth. Recent programs, including Ecolab Science certified and Net 0 Have further differentiated Ecolab's value proposition and enable us to help create better customer outcomes and reduce the environmental impact, while simultaneously reducing their costs.

Speaker 1

Our new business wins and innovative pipelines are at record levels. New market focus areas are positioned well to drive growth, and our leading digital capabilities continue to add competitive advantage. Our strong business momentum along with enhanced value proposition and favorable macro trends position us well to leverage the post COVID environment and deliver further Superior shareholder returns next year and for the future. And now here's Christophe back with his comments.

Speaker 2

Thank you, Mike, and good afternoon, everyone. Great to be together with you today. So Q3 has been another very good quarter for Ecolab, Demonstrating once again that Ticolaab is in a great shape with strong top line momentum and a proven ability to effectively mitigate the adverse effect of inflation And the so called supply shortages. Underlying sales trends were strong across the board. In a complex environment, we delivered 10% reported and 8 And fixed currency organic sales growth, driven 1st and foremost by continued strong momentum in institutional and specialty They delivered 17% sales growth in the quarter and 24% from the institutional division.

Speaker 2

We also saw accelerated momentum in industrial sales With 7% growth and 13% in other segments driven by sustained high performance in pest elimination. HealthCare and Life Sciences posted negative sales growth year on year as they compared to exceptional growth during the pandemic as we know. However, the respective underlying sales growth stayed on a healthy mid single and double digit trajectory. This top line momentum combined with accelerating pricing and structured productivity that's benefiting from our state of the art digital automation drove the strong adjusted EPS delivery. More than offsetting short term impact from Hurricane Ida and the rapid acceleration of global cost inflation, The team did an exceptional job minimizing the impact of Hurricane Ida, which we were able to successfully manage to be a much Lower impact than initially expected at only $0.03 in the quarter.

Speaker 2

Most importantly, the team mitigated the impact Additional significant supply shortages to ensure exceptional service to customers while driving continued new business wins and strong price increases, Contributing to 31% increase in free cash flow. Current sales momentum is strong and we expect it to accelerate. Strong new business and breakthrough innovation are expected to continue to drive top line growth. Also pricing will keep accelerating towards 4%. The strong volume and price momentum is expected to result in Q4 showing better year over year sales growth than what we've seen in Q3.

Speaker 2

At the same time, delivered product costs will keep increasing rapidly, which will continue to mitigate with great pricing. However, as we know with our model, this takes time to do well in a way that's sustainable long term and aligned with the incremental value we create for customers. We therefore estimate that the time lag between pricing and cost inflation will impact the 4th quarter EPS by approximately 0 point 2 zero dollars versus what we expected just a few months ago, but that too we'll address over the next few quarters. Net, we expect Q4 EPS to continue to grow double digits, though not as strong as in Q3, which will help us exceed the year with great momentum. With strong volume growth, continued pricing and delivered product cost hopefully nearing its peak, we then enter 2022 in great This strong fundamental business momentum combined with continued market recovery provides us with great confidence in the future and In a world full of uncertainties, we keep driving strong business wins and a competitive differentiation.

Speaker 2

In a world where customers struggle to find reliable partners for innovation, especially product supply and expertise to help them run their operations efficiently And serve their customers safely, we have substantially strengthened our position as they are clear, innovative and reliable global partner. In a world where our institutional specialty customers and consumers especially are concerned about increased risks of infection, Ecolab Science certified has become the reference that provides guests with the assurance they're looking for. And in a world where environmental impact has become front and center, Our net zero offering is providing industrial segment customers, especially leading in innovative ways to deliver on their commitments while improving their own financial returns. All this provides us with confidence that 2022 will be another strong year for Ecolab with sales and earnings growth above our long term trends. So with that, I look forward to your questions.

Speaker 1

Operator, please begin the question and answer period.

Operator

Thank you. We will now be conducting a question and answer session. We ask that you please limit yourself to one question and one brief follow-up question per caller so that others will have the chance to participate.

Speaker 3

Thanks for taking my questions. So my first one is on the guide. It sounds like you expect organic revenue growth to accelerate In the Q4, often already strong result here in the Q3. I know that some of that should come from better pricing, but are there other areas of the business Did you expect to accelerate in the Q4 as well? And could you talk about what some of those might be?

Speaker 2

Yes. Thanks for the question, Tim. So you mentioned to the pricing, we'll keep accelerating in Q4. We have to and we can as well. So with the value that we're creating for our customers, so that will Help drive organic growth, obviously.

Speaker 2

Volume growth will keep accelerating as well in most businesses, industrial being one good example. An institution that is going to keep doing really well as it recovers. And you will have as well, so health care and life science that are going to compare such to Easier comps last year than we had in Q3 and all that brought together, so will bring us to a better place for Q4, Probably nearing to the double digit level.

Speaker 3

Okay. That's even more than I was thinking. Thank you. And then quickly on margins, I saw industrial margins took another step back this quarter. But I know you guys have talked about these margins and building upon the gains you made in 2020.

Speaker 3

So my question is, is the step back primarily related to the raw material cost Pressure? In other words, would you still be on track to hold the margin gains you achieved last year if not for those raw material cost pressures? I'm just trying to understand What a normalized operating margin should look like for that business?

Speaker 2

Yes, that's the good way to look at it. Normalized The margins would keep improving actually. So if we think mid to long term, the margin trajectory for industrial We'll become even healthier going forward because when we talk about give back, we're not giving back anything. Pricing is going up Quarter over quarter, in industrial, like in other businesses, by the way, as well. Volume is going up as well.

Speaker 2

So it's kind of this short term inflationary pressure, which is quite strong, which is growing so quicker than the way we price For all good reasons, since we want to make sure that we keep all customers while we do that and that we drive it to buy the value we create as well. Ultimately, so when the delivered product cost curve is going to ease, margin is going to improve again, as you've seen last year, by the way, Which was the end of another cycle as well in industrial.

Speaker 3

Very clear. Thank you.

Speaker 2

Thank you, Jim.

Operator

Our next question is from Manav Patnaik from Barclays. Please proceed with your question.

Speaker 4

Yes. Thank you. I was just hoping you can give us an update competitively in terms of your I'm guessing everyone's raising prices and Customers are aware of that, but has the share gains moved one way or the other? Just curious if there's any update there to provide.

Speaker 2

Yes. Hi, Manav. So I wish that most competitors would be driving As much pricing as we do, it's unfortunately not exactly the case, which thank God, we drive pricings based on the value we So we have a good discussion. So with our customers saying we have opportunities to add value in your own productivity And we will get part of that as well. So going forward, if I look at most of the competitors in most of the businesses, They're all behind us in terms of price evolution.

Speaker 2

So we see ourselves as being the leader in most of those industries as well. So we need to show the way as well. So Part of the reason, but ultimately, I wish that they would be a bit stronger as well in terms of price evolution.

Speaker 4

Got it. And then just regionally in Europe versus your bigger competitor there or Any update to how your recovery in Europe is progressing?

Speaker 2

It's generally Quite good. The recovery was a little bit steeper in Europe than in the U. S. Because as you know, so they went from kind of Totally locked down, so to almost totally opening it up, which was different, in the U. S.

Speaker 2

And then you have a bit of the bumps in the UK or in Germany because cases numbers are going up. But generally, the trends are quite Positive and our international business, Manav, is growing positively as well. And keep in mind that last year, we were flat as well. So we were not declining in international. So having a positive growth this year is a good indication that things are recovering quite

Operator

Our next question is from David Begleiter from Deutsche Bank. Please proceed with your question.

Speaker 5

Thank you. Good afternoon. Christophe, just on Price versus raws, when do you expect to fully catch up to these high raw material costs?

Speaker 2

So David, If you just take the dollar value, year to date, we are ahead already, which is really so in the Ecolab model. So it's not Within the quarter, but if I take so year to date, pricing is ahead of the delivered product cost Dollar pressure. And for the most part, we will remain ahead. It's not a perfect science, but it comes in lockstep. To me, The main objective is making sure that we can drive margin in percent and that takes more time, obviously, so to get there because the inflationary pressures Growth faster than our pricing capability.

Speaker 5

Very good. I know it's early for next year, but as we approach November, do you have some early thoughts on how Do you think about the earnings progression for next year?

Speaker 2

Yes, it's very early, as you say, David. I think so first, On the inflation side, I believe it's going to be very similar to the pressure that we have or that we are experiencing in 2021. And that's why the pricing evolution that we have this year, roughly 2%, we're Expecting to get towards 4% next year will be a good equation, at least all the time. And generally, so for the trends for 2022, when I just step back a bit, I think it's going to be Fairly consistent with what we've seen in the second half of the year. So overall, it's going to be probably better than what we've seen pre COVID, If I may say, so kind of good top line momentum with good leverage with it.

Speaker 5

Very good. Thank you very much.

Speaker 6

Thank you, David.

Operator

Our next question is from John McNulty from BMO Capital Markets. Please proceed with your question.

Speaker 6

Yes. Thanks for taking my question. Just on the topic of the institutional business, can you speak to where you are From a volume perspective relative to 2019, for your Q3?

Speaker 2

It's a good question. I'll need some help for that. We are recovering very nicely in institutional, so in general. Maybe just to give you an idea of the trajectory, we expect to be ahead of 2019, kind of early 22, I don't know which month that's exactly going to be. That's depending on a bunch of things.

Speaker 2

But generally, we see that in the next 3 to 6 months, it's going to happen, so for sure. So right now, we are kind of roughly in Q3, so 11% down in volume, and we will be expecting so to be close to 2019, so early 2022.

Speaker 6

Got it. Okay. So you've come back a good bit of the way. I guess as a follow-up, you mentioned a bunch of labor issues For a handful of your kind of general customer bases, can you speak to how much of an issue that is for them? How does it impact the overall growth of for that business to recover?

Speaker 6

And then also maybe some of the solutions that you can provide some of these customers that help them with their labor issues.

Speaker 2

Yes, it's a great question because it's a real challenge for the industry, not just For our end customers and really specific to institutional here. So the whole distribution channel is also struggling with that. So Getting trucks unloaded from our plants at the distribution center and then afterwards getting the picking right So for our customers, it's an interesting world out there. But I'd like to say as well what's really important is that Most, if not all of our customers, including the distributors, clearly, are underlining Our service quality, we've done huge efforts to make sure that we can deliver to our distributors and to our customers, which is 1st and foremost, what needs to happen, especially with Hurricane Ida that didn't help, but I think that we've ended up In a very good place in terms of service level. Now to your question on the staffing, if you just look at the numbers A bit here, so institutional business up 24%, so very good progression.

Speaker 2

We are almost At same level as 2019 in terms of customers that we're serving as well, we have our restaurant sales that are Not even 10% down, so versus last year when the dine in, foot traffic is down over 20%. So Generally, we're doing very well versus the market. But at the same time, when you go to restaurants, So it's basically showing an indication that we could be Even better or will be better the moment that they get the staffing right. And last but not least, to your point on how we help them Get there, obviously, the service that we provide on a regular basis going there, well, is very helpful for them because if the Kitchens, if the housekeeping, if the warewashing is not done properly, well, it's even worse because they usually don't have people who can truly do the work since they're all new, Changing so often as well. That's problematic.

Speaker 2

And we provide a lot of products as well that need much less labor As well at the same time, you think about the disinfectants we talked about against COVID, well, you don't need to rinse, for instance So you save a lot of time doing the same work that other companies offer. So that's helping as well with the labor shortage.

Speaker 6

Got it. Thanks very much for the color.

Speaker 2

Thank you.

Operator

Our next question is from Chris Parkinson with Mizuho, please proceed with your question.

Speaker 7

Great. Thank you very much. You're clearly not only enthusiastic on, but you are on the share gain fronts, which seems to be across the portfolio. But what's the primary driver here? Is it enterprise selling as you spoken in the past, new platforms like Science certified, digitization, new customers' desire to go with the brand name.

Speaker 7

If you could just briefly dissect The recent success, what underscores your multiyear confidence, it would be greatly appreciated. Thank you very much.

Speaker 2

Hey, you're welcome, Chris. So there are a few drivers. The main one we have is really sort of the new business generation. It's It's not new. You're familiar with that.

Speaker 2

We have close to 1,000 people managing, so corporate accounts, as we call them, and we're very proud And net new business generation is at an all time high, which is good because it's the pipeline of new business as well for the future. And it's driven by 2 main drivers, if I may say. 1 you mentioned, it's the Ecolab Science certified, Especially on the institutional side, so customers are looking for ways to provide the right confidence for their own customers, their guests, As they call them and science certified requires the full Ecolab program to be certified. Well, that means higher penetration of most of the solutions, assets. So we get more units and more solutions within the existing units In order for those customers to get to the certification, one of the latest, as I mentioned, on Investor Day, so is McDonald's, Which has been a great story with them endorsing ScienceCertified.

Speaker 2

And on the industrial side, is our net zero program It's getting some very interesting traction, because many of our customers, if not most, have made A lot of sustainability commitments out there that some of them have a hard time. So to reach or get closer to, to stay on track for that, So they need our help even more in order to get to their own commitment that's helping generating as well new business. And last but not least, New engines like data centers and high-tech are extraordinary growth drivers, really addressing new needs that Existed pre pandemic, but the pandemic has given a huge boost to cloud computing, as we all know, since we're all using these virtual technologies, Well, that's driving our own business as well at the same time.

Speaker 7

That's very helpful. And just as a very quick corollary to that, Just turning to European Institutional, recently it was a little bit sluggish versus its regional peers, but it seems to be edging in the right direction. Can you just briefly comment on what trends you're seeing there across the region, share gain opportunity and just your ability to further drive margins higher across the region. Thank you very much.

Speaker 2

Yes, good question, Chris. We've done the last 10 years and you've been following us for a long time, A lot of fundamental work in Europe for all our businesses. When you think about it, 10 years ago, we were making no money as a company in Europe. Now we are in the North in 13%, 14% in that region. That's been a remarkable profitability improvement.

Speaker 2

Interestingly enough, institutional has not made as much progress as all the other businesses in Europe because there was So much fundamental work that had to be done in terms of organization, in terms of systems, in terms of leadership, in terms of innovation. Well, it's taken us more time, but I would say the pandemic has helped us in a way. It's hurt us short term, obviously, when everything was shut down. But ultimately, our customers have seen that they needed a partner that could help them to provide the assurance to their guests, Which was new. That was not exactly the focus that we're having pre pandemic.

Speaker 2

And now so we're getting the fruit of all the work we've done over the past few years Where customers are recognizing that, well, we're adding value that other suppliers can't provide.

Speaker 8

Great. Thank you.

Speaker 2

Thank you.

Operator

Our next question is from John Roberts with UBS. Please proceed with your question.

Speaker 9

Thank you. Just a little clarification on the labor comments, Customer labor comments that you made earlier, are you do you have any lost revenues because the customers just don't have enough staff to do all the cleaning that they would prefer to do.

Speaker 2

Absolutely. When restaurants are open, John, 3 days a week That of 7 or whatever the schedule is, well, this is lost revenue for them and this is lost revenue for us. But the good news is that, well, they're going to open up At some point, as they did pre pandemic as well, that's going to help us as well.

Speaker 9

No, I meant just, they're opened, but They're short staffed while they're open and so cleaning is getting deprioritized.

Speaker 2

It was the case, John, Early on, it's evolving quite nicely because you and I being guests in hotels and restaurants, Well, we had some understanding for the lower cleaning standards during the pandemic. We're paying the same price at the end for a room or for a meal. So we expect as well, so a similar quality of Service and of cleanliness as well. So this is something that's coming back progressively, but the labor shortage is Hurting that. So the trends are good.

Speaker 2

It just takes time to get back to the right place.

Speaker 9

And then I don't think Healthcare and Life Science It's very seasonal. So could you talk a little about the sequential change on a sequential basis? I assume, hand sanitizers

Speaker 2

So a few things here. You're right, it's not really a seasonal business. That's not the way we look at it, for sure not. But last year was an exceptional year because of demand and because of a lot of government driven Demand for hand care sanitizers and all those products, ultimately, are exceptionally high back then. If you just look at the Q3 sales, so 17% down versus last year, but they were up 8% versus 2019, if you just do the math.

Speaker 2

And in terms of mix and not so much seasonality, What's driving profitability in healthcare is mostly the surgical part and COVID, as you know, also has shifted Why the elective surgeries, which has shifted our business as well, so towards a lower profitability type of business. But this is Short term, it's driven by COVID. The moment that surgeries are coming back, ultimately, we'll have the double combination 1st, on seeing growth because we will be comparing against the more normal period. And second, profitability is going to come very naturally back Thank you. You're welcome, John.

Operator

Our next question is from Gary Bisbee with Bank of America. Please proceed with your question.

Speaker 10

Hey, guys. Good afternoon. So I wanted to go back to Institutional for a minute. I think versus 2019 pre pandemic, if you adjust for Currencies in the last 2 years, the business, the institutional segment remains 8% below pre pandemic revenue levels in the quarter. And You commented you thought volumes in the next 3 to 6 months would get back to pre pandemic levels.

Speaker 10

Does Does that equate to that revenue gap getting back to pre pandemic levels? Or are there other Puts and takes that could lead revenue to take longer. And as part of that, I guess I also wondered What sort of unit level, customer level do you think you'll be at when revenue gets to pre pandemic levels? And I ask that from the perspective of you've talked about more products per unit, particularly for those clients that are using Ecolab Science certified. Thank you.

Speaker 2

Yes. So Gary, big picture, as mentioned earlier, Additionally expected, so early 2022, so to get back to 2019 levels, at the top line level or exactly which months But within the next 6 months, it's going to be the case, which is a very Steady and healthy recovery. With that, the fact that we had very good new business, Well, that's going to be installed as well in the months to come. So if today, we have almost the same number of units And the same number of solutions within units out there, well, is going to compound. Then afterwards, once we get more units, More days that are going to be open, more staffing in the restaurants as mentioned as well before.

Speaker 2

So all those elements Ultimately, are going to help institutional accelerate versus what we saw in 2019 pre pandemic as well. On top of it, you have pricing That's also evolving in the right direction, as in every business that we have in the company that's going to add to it as well. And last but not least, from an earnings perspective as well, institutional has done remarkable work in terms of field organization, system implementation that really help us well, drive an even better leverage, in that business. So overall, Trending in the right direction. It's going to take a few quarters in order to get there, but I feel confident that we're really still on a good path.

Speaker 10

Okay, great. And then you've talked a lot about your own pricing and how you're handling the raw material pressures. If we just think of supply chain in general, not so much the cost and pricing angle, but are you seeing Any volume issues of your own? Or do you feel like any of your customers in any of the segments are really being impacted in the volumes they're using based on the widespread supply chain challenges that are going on globally? Thank you.

Speaker 2

To a certain extent, yes. So the labor shortage, as we mentioned before, but that's That's the one that you're talking about, obviously here. But take the example of the car industry, so The chip shortage that's happening out there, well, has nothing to do with our own operation, But it's reducing the demand just because there are less costs being produced because they can't produce them because of the chips ultimately out there. So that's one. So that's something we can't control, obviously.

Speaker 2

What we can control is always making sure that We can supply our customers in a way that doesn't stop or impact their own operations. And In this crazy world of shortages and hurricane and Texas freeze and you name it ultimately, not one customer had To stop ultimately, because of what, we're not able to supply. I've met a bunch of CEOs over the past few months And all have been very complementary as well in our ability to serve them in a difficult environment. So Net net, yes, it's not helping growth. If there were no shortage, we would be probably growing faster, But I don't think that it's a major impact on us.

Speaker 2

Thank you.

Operator

Our next question is from Vincent Andrews with Morgan Stanley. Please proceed with your question.

Speaker 6

Thank you and good afternoon everyone. A bit of a follow-up on the supply dynamics. When you speak to your suppliers these days, How much of the issue at this point and as we look into 2022 is still that they're struggling to get their Plants back up and running at a full run rate versus just that the broader customer base very much wants to rebuild inventory and is also probably seeing very good demand. And so is

Speaker 1

it how much of a risk do

Speaker 6

you see that either, A, there's another Run up in raw material costs even as supply normalizes just because people want to rebuild inventory, or be it just that the raws stay stickier At these higher levels well through next well into or through next year?

Speaker 2

Well, the short answer is that, I think it's going to last 12 plus months, what we're experiencing now and that's the way we organize, that's the way we're addressing it, that's the way, we're planning Issues that are existing as well. There are many suppliers as well in the U. S. Who have gone through force measures As well over the past few months, sometimes for great reasons and sometimes not so much, just to get some more margins as well with costs going up as well. So the way we're thinking through that is that, as mentioned earlier, I expect the inflationary pressure in dollars in 2022 To be very similar to the one in 2021 with kind of easing, plateauing during the second half of next year, which is why On one hand, so thank God we've gotten very well organized in order to become more resilient in order to make sure we can supply our customers And second, that we're doubling our pricing, so from 2% to 4% 'twenty one versus 'twenty two in order to address that.

Speaker 2

And if the world gets better earlier, Well, we're all going to be happy here.

Speaker 6

Okay. Thank you very much.

Speaker 2

You're welcome, Incy.

Operator

Our next question is from Laurence Alexander with Jefferies. Please proceed with your question.

Speaker 11

Good morning. Good afternoon, guys. It's Dan Rizzo on for Laurence. Just in terms of the pricing that we've talked about a lot, is there situations where there's pricing rebates or pricing givebacks If things were to ease dramatically, I mean, obviously, that's not expected, but if the world changes in, I don't know, 6 months, 9 months, would you give pricing concessions?

Speaker 2

Overall, we don't, Dan. We're serving 3,000,000 customers in the world. So, I won't say that it's But generally, if you look at just the last 10 years, Ecolab never went backwards in pricing. You have yours with higher pricing and some with lower pricing and in average you get to 1% plus, something like that, which is a good indication of the fact that pricing is something that we hold, going forward. And why that is because we always link the pricing that we're asking with the value that we're Creating software with customers, how much dollar value we've had them create by reducing the usage of natural resources, their Improved productivity, reduced waste and so on ultimately.

Speaker 2

That doesn't go away when the raw materials go down ultimately, which is on one hand the reason why pricing is always going to go up and second that the margins ultimately saw for the company gets Better because you get lower input costs for a price that keeps going up as well. And last point is innovation as well, Which is always brought in the market with higher margin that helps us while improving the leverage in a much more natural way.

Speaker 11

That's really helpful. And then just one clarification on something you said before. Did you say that you expect the raw material or the inflationary environment to last for all of

Speaker 2

Yes. I wish I could know exactly, but I'm saying the next 12 months, it's going to be the case, and that's the way we're planning. That's the way we're getting organized. So I think it's going to ease the second half of next year. When is it going How much is it going to be?

Speaker 2

I don't know. We're planning with the fact that it's going to be a tough year next year in terms of inflation. And if it gets better, Done okay. It's going to make everything easier. Okay.

Speaker 2

Thank you very much. You're welcome.

Operator

Our next question is from Eric Petrie with Citigroup. Please proceed with your question.

Speaker 12

Hi. Thank you and good afternoon, Christophe.

Speaker 2

Good afternoon,

Speaker 12

Eric. Which segments of industrial have you seen the greatest initial interest in your net zero program?

Speaker 2

That's a great question. It depends when, Eric. The ones over the last few years have been The food and beverage customers, those are the consumer goods brands that are the most on the leading edge Because their own consumers are asking them to behave the right way in terms of Interestingly enough, all the high-tech companies, like Microsoft, who have put the most ambitious Commitments by 2,030, you've read that. So they want to be so carbon positive and water positive as well, which means kind of Giving back all their views since the beginning, being in operations whenever that was early 90s, as Microsoft. So there we use a lot of new technology for that.

Speaker 2

And the last one I'll just mention Eric, which is becoming very That was not interested 6 months ago, interestingly enough is downstream in oil and gas because While investors and consumers are truly asking them to shift and those ones are coming to us And they did not 12 months ago. So very different types of industries, but the trends is clearly going all in the same direction.

Speaker 12

Thank you. And then a question on Ecolat Science certified. I think the program was launched sometime in Q3 of 2020. When do you think you'll reach a point of market saturation or where the program doesn't add to top line?

Speaker 2

That's a great question. I hope never, but well, there's 100% somewhere, obviously. But interestingly enough, so we have today 33,000 locations that are Ecolab Science certified in the U. S. And we're serving close to 200,000 locations.

Speaker 2

So there's a lot of runway And that's just in the U. S. We're expanding in Canada, in the UK. Right now, it's easier because it's the same language. So for the most part as well.

Speaker 2

And then we have the rest of the world. But we're careful in expanding internationally because since it's a new program, as you mentioned, so Launched amid last year, really want to understand how it works, how it's perceived, what's right, what's not right, as well. So I think that the runway is quite long and it's been much more successful than I thought it would be. Initially, I thought it Would be just COVID related. While this is not the case, interestingly enough, lodging customers or hotel, are becoming increasingly interested in that Program because guests want to have that feeling of well-being when they go to our hotel, the same for offices as well.

Speaker 2

So Those are new opportunities that we didn't think about early on. That adds ultimately to the accessible market that we have in front of us.

Speaker 12

Thank you, Christophe.

Speaker 2

Thank

Operator

you. Our next question is from Kevin McCarthy with Vertical Research Partners.

Speaker 13

Yes, good afternoon. Christophe, I was wondering if you could talk through the hurricane impacts. It looks as though The impact is expected to be half of what you thought it might have been on September 13th. And your prepared remarks suggest you attack that through pricing and productivity. So I was wondering if you could address each of those things and Provide some more color as to how you went about mitigating that?

Speaker 2

Great question, Kevin. Well, it's Our practice is when we see something happening that was not planned, we always Get to you as quickly as we can to be transparent with what we see at that moment. So the downside of that practice It's obviously a week or 2 later if things have changed, for the better, in that case. Well, the forecast It's a bit different as such. To give you some color on the Hurricane Ida, we have systems showing where the hurricanes Are going to go through what's the path of the hurricane.

Speaker 2

And we initially thought that it would really so Avoid one of the large plants that we have in Louisiana, in Garyville. Well, unfortunately, a few hours before it changed and it's yet exactly saw one of our main plants in the U. S. And with the damage we had there, we thought the plant would be closed for 3 months. And our supply chain team that Fortunately or unfortunately, depending on how you want to look at it, so has had a lot of practice this year with natural catastrophes as such.

Speaker 2

Well, as brought all the teams we had, so from other plants as well in order to help them rebuild Lines that had been damaged because you couldn't find contractors in the area either for all the reasons we know. Well, that has helped us reduce the 3 months Stop to 3 weeks, ultimately. Well, that has been great for our customers, 1st and foremost. And second, it's Allowed us to reduce the impact quite dramatically. So that's an additional point to the ones you mentioned.

Speaker 13

I see. Then as a brief follow-up, have you implemented incremental price increases over the last few months and I guess regardless of the answer, how would you expect price Contributions to trend in 4Q versus 3Q?

Speaker 2

So, the short answer is that we've gone to many customers 3 times this year. Usually in normal times, whatever that truly means, we do that once a year and it's a very Practice that the company has, where we discuss the plan for next year, how much value we're creating for the customer, What's going to be our share of that, in other words, so the price that we're going to get for it as well and making sure that the return Customers to improve. That's normal practice once a year. We did 3 times in average this year, so very unusual. I Assume it's going to be similar next year, so between 1 and 3 times.

Speaker 2

It's going to be more than 1, that I'm sure. So we go for a bunch of pricing rounds. Now Your question, Q4 versus Q3. We're heading towards 4% to enter 2022. So is it going to be the full quarter in Q4?

Speaker 2

I'm not totally sure yet. It's going to happen sometime during the Q4. So depending on when we get it done, it will be for the full quarter or it's going to be as we enter 2022. But I have a high confidence level that we're going to get the pricing that we're looking for.

Speaker 13

Very helpful. Thanks so much.

Speaker 2

You're welcome.

Operator

Our next question is from Rosemarie Morbelli with Gabelli and Company. Please proceed with your question.

Speaker 14

Thank you. Good afternoon, everyone. Christophe, looking at the price of oil having reached $80 a barrel or thereabout, Is that do you see that already beginning to help your downstream business? And still on the downstream side, How is your net zero category going to help them? Which areas are you focusing on?

Speaker 2

Yes, great question. The high price of oil makes some people happy in our organization. That's a downstream And most of the rest of the campaign are a bit less happy because that's an input cost that's going up. But net net, okay, It's okay. We know how to manage that generally.

Speaker 2

So you've seen downstream, so when up, so in Q3, so 2%. So we've crossed the ball of the 0, which is good. So we see saw really good evolution in downstream. So yes, the price of oil is helping on the demand. They've done some very good work as well in our downstream team in terms of new business.

Speaker 2

This is helping and not directly related to the price of oil for sure. And when you talk about the net 0, It's very interesting early discussions as such, but to take one example of One European company, actually with whom so we are working on that net zero program, they're basically saying, You need to help us improve the environmental footprint of our old energy, which is the refining part Before we can focus on the new energy, the renewables, as such. So we've really helped them understand that by Using the water consumption in a refinery, which by the way is the number one natural resource that's being used in a refinery, Well, you reduce the energy usage, as well electricity, so for the most part as well. So they reduce their water consumption, they reduce their carbon So interestingly enough, it's an industry that was not so much interested in even Having that discussion, that has changed dramatically and that's helping creating the demand for us.

Speaker 14

Okay. And then Thanks. That is helpful. And then looking at Europe, which you know very well since you ran it for a while, If my memory serves me right.

Speaker 2

That's right.

Speaker 14

What is well, I understand that you will never get the So what is the difference other than the fact that you have multitude of countries and different advertisements and so on? Is the competitive arena also very different? What is your new management there doing to offset some of that?

Speaker 2

Yes. So you said it the right way. So we will not reach the profitability level of the U. S. Because It's not one country and the complexity is bigger.

Speaker 2

As you mentioned, the languages, logistics, regulatory and so on, That's a cost of doing business that's higher than in the U. S. That's true for most companies, obviously. But that's not the reason why we shouldn't get close to it. But we had to really do some fundamental work Over there in getting our structure right, getting our talent right, getting our logistics right.

Speaker 2

And most importantly, we can't forget that 10 plus years ago, institutionally, Europe was a product business. We were selling products versus programs and outcomes In the U. S, because it was a joint venture with a consumer goods company 10 plus years ago That we had over there, well, that's a major culture shift as well so for our team that needed to happen. So We are a patient company. You know that we've been working on businesses for years take pest elimination, took us 10 years To bring it profitable and now it's one of our most profitable businesses globally that we have.

Speaker 2

I feel confident that in Europe, we will get to A very healthy place, even if it's not at the level of the U. S, it's going to be a very solid business down the road, but it's still going to take some time.

Operator

Our next question is from Scott Schneeberger with Oppenheimer. Please proceed with your question.

Speaker 8

Thanks very much. Good afternoon. Christoph, just Kind of taking a question off something you just mentioned. The other segment, the margin really rebounding strongly and it's now above The 2019 level, despite commentary end markets have not fully recovered. So I'm just curious if you could delve in a little bit

Speaker 2

So you know that we have in our other segments, you have a combination of different businesses, obviously. So Best elimination being the bigger and best one. You have Textile Care that's in there and you have CTG, our Colloidal Technology Group, very different businesses, obviously. So it's hard to talk about an average as such. The main driver is pest elimination, that has done a remarkable work during the pandemic, By the way, so they've recovered very quickly during 2020 and kept growing as well In 2021 and at the same time have managed as well to improve their profitability versus 2019, 3.5 percentage point, as such.

Speaker 2

So large business growing very nicely, Profitable and getting more profitable. Obviously, you get a lot of leverage and Scott that drives the good results that you've seen in our so called other segments.

Speaker 8

Excellent. Thanks. Appreciate that. And then in my follow-up on that, kind of delve into in the supplemental discussion in the summary section, There is commentary expecting to enter 2022 solid momentum, driving strong top bottom line through product and service innovation, Digital solution, new markets and appropriate pricing. Just curious, Christophe, is at this point, can you elaborate on new markets in that sentence, Specifically, what you had in mind, if not, I'll have a follow-up.

Speaker 8

But yes, I just want to delve on that. Thanks.

Speaker 2

Yes. So it's kind of all of the above, starting first with new business. It always feels a bit mundane, but We have this mantra in the company that, in doubt go and sell something. And it's really so having everyone trying to sell new customers, new Solutions to existing customer, this is job 1, and we want to make sure that we don't lose, obviously. So that's that And interestingly enough, when you do more pricing, that has an impact as well on how much new business.

Speaker 2

So it's not the perfect science, but we manage that reasonably well Very well, if I may say. In terms of new markets, I'll mention a few. So the one I expressed before, Our data center business, which is driven by the whole boom of cloud computing, We've created that high-tech division, which is really dedicated to those companies with their Needs uptime, quality, cybersecurity and all that, which is growing extremely fast. So that's, one of the new markets. Animal Health is another one, which has been hit a bit by the pandemic and some difficulties in some countries.

Speaker 2

But ultimately, that's also one that's going to grow very fast in the years to come. And most importantly, you have Life Science, Which is a business that we created 5 years ago. It's a €300,000,000 business growing double digit with Extremely high profitability as well. This one is just at the beginning of its growth story. And as you know, Life Science is serving mostly the pharma industry, which is a $1,000,000,000,000 industry growing double digit.

Speaker 2

And for me, we have so much to offer to that industry. I think that's going to be the number one new market to use you term That's going to help us grow as well next year and the years to come.

Speaker 8

Excellent. Sounds good. And that's what I expected to hear. Just wanted to make sure there wasn't anything Geographical or perhaps expanding, but I'll turn it over. Thanks so much, Christophe.

Speaker 2

You're welcome.

Operator

Our next question is from Shlomo Rosenbaum from Stifel. Please proceed with your question.

Speaker 15

Hey Christophe, A couple of quick questions. Just maybe some of the growth in Water and Paper particularly strong. Can you dissect how much would you say is Coming from easier comps and how much is really an accelerated cadence of those businesses that we should be thinking about just on a more regular basis? Yes.

Speaker 2

So first on water, it's been a steady business for many, many years Because of all the right reasons is that water scarcity becomes a bigger issue and by reducing the water usage, you reduce Energy usage, you reduce your carbon footprint. So it fits really well with the net zero idea. So The water business, which is a very large business for our company, has been successful for years and will keep going well because Customers need it even more because of this net zero approach as such there. Now on paper, It's been an unbelievable year. In Q3, you saw growing, so 19%.

Speaker 2

You have kind of a third of it is Pricing, twothree is volume, some is comp, but a lot of new business as well has been generated in our paper So it's not going to stay at that high level as such because the comps are going to normalize going forward, But it's going to remain a healthy business going forward with very nice profitable margin as well.

Speaker 15

Okay, great. And what's the interest internally at Ecolab to pursue M and A within that pest There's been more consolidation outside with other players who bought a lot of smaller businesses. Is that something that you guys would be interested in going And doing more activity over there or alternatively if someone approached you about your business, would you be interested in doing a deal with someone else?

Speaker 2

So hard for me to comment on M and A, as you know, Shlomo, but It's a great business for us. So it's definitely not excluded from what we're looking at. That's the way. It's grown to a certain extent as well. We started with an acquisition in North Dakota, so a few decades ago as well.

Speaker 2

So we know how to do it. It works really well. We do not exclude it. Is it number one priority in terms of M and A? No.

Speaker 2

I've always mentioned it's life science, water, healthcare and digital are the big ones out there. But, hey, Sloem, we will not have strategy getting on the way of making money. So if there's a good opportunity out there, we'll consider it

Operator

Mr. Monahan, there are no questions at this time. I would like to turn the floor back over to you for closing remarks.

Speaker 1

Thank you. That wraps up our Q3 conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation and best wishes for the rest of the day.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference.

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Earnings Conference Call
Ecolab Q3 2021
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