Ecolab Inc. (NYSE:ECL) Q4 2023 Earnings Call Transcript

Ecolab Inc. (NYSE:ECL) Q4 2023 Earnings Call Transcript February 13, 2024

Ecolab Inc. beats earnings expectations. Reported EPS is $1.55, expectations were $1.54. 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 Fourth Quarter 2023 Earnings Release Conference Call. This time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. At this time, it is now my pleasure to introduce your host, Andy Hedberg, Vice President of Investor Relations. Thank you, Mr. Hedberg. You may now begin.

Andy Hedberg: Thank you, and hello everyone, and welcome to Ecolab’s fourth 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 estimates of future performance. These are forward-looking statements, and the 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 our posted 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 so much, Andy, and welcome to everyone on the call. The very strong performance in the fourth quarter capped off a phenomenal year for our company. With the fourth quarter, organic sales growth of 6% and adjusted earnings per share up 22%. I’m so proud of this team, because this strong performance underscores the collective hard work and dedication of our entire Ecolab team, and reflects our sustained focus over the last few years on driving long-term growth the right way. Despite the unpredictability of macroeconomic conditions, our team drove further value-based pricing while maintaining our strong business momentum. Volumes in the fourth quarter continued to improve with the positive growth, reflecting new business wins that more than offset soft macro demand.

Our success is anchored in the value we create for customers by improving their operating performance while also reducing the water and energy consumption. In 2024, our focus remains on continuing to fuel our strong and consistent long-term double-digit earnings per share growth. The highlights for the fourth quarter was the continued and rapid expansion of our gross margin, which increased by 330 basis points and our organic operating income margin, which increased 200 basis points to 16%. This growth was led by a 390 basis point increase in the Institutional & Specialty segment margin, as we continue to quickly narrow the gap to this segment’s historical 21% operating income margin. The Institutional & Specialty team continues to execute well, driving further value pricing and volume growth that accelerated to the mid single-digit range, reflecting the strong new business wins.

The Industrial segment operating income margin increased 220 basis points with notable expansion in each of our Water, Food & Beverage and Paper businesses. And other segment’s operating income margin was up 160 basis points driven by strong Pest Elimination performance once again. As expected the Healthcare and Life Sciences segment operating income margin eased versus last year. Healthcare’s profitability continued to improve, which is good, reflecting the benefits of separating our North America operations into two focused businesses as mentioned infection prevention and surgical. Healthcare’s income growth was more than offset by comparison to the very strong performance of Life Sciences last year in continued market pressures. Most importantly, operating income dollars for this segment have grown, sequentially throughout 2023 from the actions we have taken to improve performance, and we expect this growth to continue over the course of 2024.

From a sales perspective, our Life Sciences business drove slightly positive growth in 2023, despite the market being down double-digits. And while we continue to expect this market to remain soft for the next few quarters, our ongoing investments in new capabilities and new capacity enabling us to gain market share in this very attractive long-term high-growth and high-margin market. Our overall performance highlights the strength of the Ecolab model, as we continue to execute on pricing and driving new business all backed by delivering leading customer value. Additionally, we’ve seen some benefits from moderately lower delivered product costs. This costs are still up 35% compared to 2019 levels, but declined by mid-single digits relative to last year’s fourth quarter a bit more than we had anticipated.

We continue to take a prudent stance on the trajectory of delivered product costs. Therefore, our outlook for 2024 assumes that, these costs will remain favorable in the first half of the year, and stable in the second half of the year. Although, we are very pleased with the margin expansion, we have delivered so far. Our focus remains on fully recapturing our historical 44% gross margin to reach our 20% OI margin target. Our value-based pricing model and delivered product costs that are now coming down, a further strengthened our conviction in achieving this target over the next few years. Our underlying productivity also remains strong, as we continue to leverage our leading digital capabilities. As expected SG&A expenses, remained relatively stable compared to the third quarter.

And consistent with previous years, we anticipate a few percentage point sequential increase in SG&A dollars in Q1, but expect to drive further improvements in our SG&A ratio as the year progresses. We expect 2024 to be another strong year for Ecolab, building on our long-term 12% to 15% earnings growth trajectory that is amplified by shorter-term benefits from lower delivered product costs. For the year, we expect adjusted earnings per share to grow in the 17% to 25% range, which assumes soft, but stable microeconomic demand and lower delivered product costs in the first half of the year, as global inflation eases. With this, we expect to maintain our business momentum as we drive further pricing, volume growth, and continued robust operating income margin expansion.

Looking at the first quarter, the benefit from lower delivered product costs is expected to peak with costs down high single digits in the quarter, resulting in adjusted earnings per share increasing 44% to 56% versus last year. Beyond the first quarter, quarterly adjusted diluted earnings per share growth is expected to progressively normalize towards the upper end of Ecolab’s long-term 12% to 15% target, as favorability from lower delivered product costs eases. As always, we will also remain good stewards of capital by continuing to invest in the business, increasing our dividend, and returning cash to shareholders. Most importantly, with the best team science and capabilities in the industry, we will continue to grow our share of the stable and high-quality $152 billion market we serve.

I believe Ecolab’s long-term parameters are stronger than ever and I’m confident in our outlook for continued strong performance, as we work to deliver superior shareholder returns. So 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: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from Tim Mulrooney with William Blair. Please proceed with your question.

Tim Mulrooney: Hey, Christophe. Good afternoon.

Christophe Beck: Good afternoon, Tim.

Tim Mulrooney: If I’m recalling correctly, you guys talked about Europe, as kind of being a drag on growth in 2023. Can you talk about how volumes trended in Europe in the fourth quarter? And what volumes for the business overall, look like if you were to exclude Europe? Thank you.

Christophe Beck: Love that question, Tim. Thank you. Well, two parts of your question obviously here. So let me give you a little bit a picture of the broader company and then specifically to Europe, which had a lot of good stuff to offer as well at the same time. So as the world is slowing or has been slowing over the past few quarters, especially outside the US, especially in Europe, as you mentioned as well. Well, I’m really glad that we shifted to offense as we shared with you a few quarters back because it’s really working. As you’ve seen so in the fourth quarter our volume growth went up one percentage point in Q4. And to your question, if you exclude Europe, our volume growth would be 3% up so quite a bit. So now our job is absolutely to maintain that choosing speed in 2024.

As we rebuild margins obviously, the right way, which means in Ecolab speak in a way that benefits customers by reducing the total operating cost. But to your point on Europe, specifically. Yes, it’s been a drag on growth in overall company plus 1% excluding Euro plus 3%. Europe has had an exceptional year in 2023. We reached almost 14% operating income margin, which was our objective when we started the whole transformation in Europe. So good evolution in a very difficult market, where we prioritized really making sure we get the right margins, the right businesses, the right customers investing in the right places. So slight volume decline, very good pricing and really focused on the right businesses with the right productivity. So good year in Europe, difficult from a volume perspective but good for the overall company in Q4 and especially so the 3% ex Europe is a very good news for us.

Operator: Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please proceed with your question.

Ashish Sabadra: Thanks for taking my question. Just as we think about fiscal year 2024, how should we think about the volume growth as well as pricing normalizing in 2024? And congrats on the solid quarter. Thanks.

Christophe Beck: Thank you, Ashish. Good question as well. So in that environment as described before, so with Tim, I really expect that to stay on our long-term average Ecolab growth trajectory. With what I would say is a 2% plus pricing as I’ve shared with you as well and positive volume growth as we’ve had in the fourth quarter as well. But bottom line our long-term growth target remain unchanged. Even in difficult environments it’s going to be a little bit lower than that range for 2024 where we prioritize obviously getting the right value pricing, while keeping driving growth as we did in Q4 and that will help us deliver a very good year in 2024.

Operator: Our next question is from the line of Seth Weber with Wells Fargo. Please proceed with your question.

Seth Weber: Hi guys, good morning. Maybe just if I could just clarify Christophe that last comment. Are you is pricing 2% in 2024? Is that what you said? And then my bigger question is I was trying to disaggregate the five points of pricing that you got in the fourth quarter how much of that is new versus carryover, which I guess is ultimately kind of the same question, but I just want to make sure I understood your answer to the prior question about pricing for 2024?

Christophe Beck: Yes, a few elements to unpack here. So, the 5% in Q4 was all new pricing realized in 2023, there was no carryover anymore from the previous years. In the fourth quarter, which was a remarkable accomplishment. So, the 5% in an environment with delivered product costs. So, tends to ease, Obviously, the fact that we can still get incremental pricing from our customers because we deliver even more value to them in terms of total operating cost reduction, for me it’s a very good sign. And as I’ve shared with you I don’t know exactly where pricing is going to end up on a longer term basis. We used to be one plus pre-inflationary cycle if I may say. And what I’ve shared with you is to say I’m fairly confident that we will be north of 2% as I called it so the two-plus for the future.

We’ll see where we end up. I feel good about the two-plus. That’s going to be true for 2024, while we keep volume growing as well at the same time. So, let’s see where we will end up.

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

Josh Spector: Yes, hi. Good afternoon. So, I wanted to ask about the cadence of earnings through the year. So, first congrats on a strong guide for the first quarter. But I guess if you look at the typical run rate, you’re up about 30% — $0.30 in the second order, another $0.30 in the second half. I guess if we run that math through, we’re closer to something in $7 in EPS for this year versus your guide in the low $6s. So, just curious if you can kind of run through. Are there things through the year that add to costs or things we should be aware of that would deter you from that path? Or any comments you have around that? Thanks.

Scott Kirkland: Hey, Josh this is Scott. I’ll cover this one. Thanks for the question. Yes, as Christophe said in his opening, we’re expecting this a bigger benefit of DPC in the first half and bigger in the first quarter. But if you look at sort of separating out DPC, would expect throughout the year that underlying EPS delivery to be at the high end of our long-term targeted range. So, it’s really this expected benefit in the first quarter, a little bit in the second quarter as well, but really looking at DPC in the second half being pretty stable.

Operator: Our next question is from the line of John McNulty with BMO Capital Markets. Please proceed with your question.

John McNulty: Yes, good afternoon. Thanks for taking my question. So, on the delivered product costs, I guess, are you expecting to see either raw materials or some other part of those costs pushing noticeably higher as we go through the year? Or is there some kind of a I don’t know speed bump, or I guess reverse speed bump some best fit that you’re seeing in 1Q? Because I guess I don’t understand why you would necessarily be seeing delivered product costs pushing higher throughout the year?

Christophe Beck: So we haven’t said higher. What we said is that we reached a peak mid of last year so 2023 and it kept easing. So, in the third quarter, in the fourth quarter, and will be the case as well in the first quarter of 2024. What we’re saying is that it’s going to keep easing in the second quarter until the second half where we expect it now to be rather stable versus last year. We know and you know how hard it is to predict, obviously, sort of delivered product cost or inflation, as we’ve seen this morning as well so was the inflationary print. It was hard to predict when it went up, obviously, how much and how quickly, it’s hard to predict how much and how fast it’s going to go down. So for now with what we see, with what we know keeping in mind that we buy 10,000 products in our portfolio.

So it’s very diverse, which is a good thing in a way as well. Some will go up, some will go down. But generally, so it’s easing for the first half stable in the second half, and we will see what truly happens. But it’s important to keep in mind what Scott just said before, we keep our eyes laser-focused on really driving this 12% to 15% earnings per share growth with everything we can control and really to get as close to the 15% as we can and DPC comes on top of it, which means the bump in the first half and in the second half so to be closer to the upper end of that range. How do we do that? Well, it’s the old fashioned way that we’ve been practicing for a long time now with new business, with value pricing with productivity, and with innovation.

That’s the way we think about it, and that we hope you will see that way too.

Operator: Our next question is from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

Jeff Zekauskas : Thanks very much. It’s a two-part question. Have volumes in the institutional business accelerated? And if so why? Or is it just that the comparisons are easier year-over-year in the fourth quarter than they were in the third? And secondly in terms of pricing, how will your price initiatives work? Are you already raising prices in the first quarter here at the beginning of the year? Or will they come later? Will they sort of make their way smoothly quarter-by-quarter through the year? Or will things bump up, I don’t know in May or June? That’s the base case.

Christophe Beck: So hi, Jeff, good to hear you. So, two questions, obviously, here for the price of one. So the volume in Institutional is clearly up. It’s not a year-on-year comparison question, especially when the market is down, as well at the same time so really showing that this business Institutional is in a great shape, with great momentum driving volume, driving share, getting price, driving margin really like where Institutional is heading. So the short answer is, yes, volume in Institutional keep accelerating. The second part of your question on pricing, there are the exceptional times like in the past few years and there are the more normal times. I would say like now, which basically the discussions with customers for the most part, they’re not all created equal obviously are happening in the fourth and the first quarter of the year, so fourth quarter and as we speak now.

So it’s usually something that’s evolving progressively during the year with no big bumps. It’s something, which is pretty organic keeping in mind that the pricing is always based on the value we create for customers, which is why we were able to deliver $3 billion in the last few years and kept it and keep building it. It’s because ultimately for customers it’s a good deal. The net-net in the ,operations while it’s positive including our pricing as well at the same time. So from a timing perspective Jeff happening in Q4, Q1 and it’s being delivered in the quarters during the year.

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

Manav Patnaik: Thank you. Christophe, it looks like a lot of things are aligning well here starting the year and you’ve touched a lot of them. I just wanted to touch base on how you thought about your portfolio. There have been a few pieces like Healthcare and even Paper that have been dragged to top line growth. And just curious on how you think about your portfolio composition today and if anything might be in the works there?

Christophe Beck: Yeah, hi, Manav. So it’s a little bit like with our kids, they’re not always doing great at the same time that’s a bit the same with our businesses. It doesn’t mean that we love them less. But if we look at all our businesses and markets out there over 90% of them had double-digit operating income growth, so a pretty remarkable bias towards good performance for all our businesses. And so I like the overall portfolio that we have. We’re also approaching investments and resources as a company. That’s been true for many years in four different buckets. The one that we want to fuel those are the ones with the highest growth potential, the ones with the highest margin potential as well, you have the one that we want to protect.