Ecolab Inc.

Greetings and welcome to the Ecolab fourth quarter 2020 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. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Monaghan, Senior Vice President, External Relations. Mr. Monaghan, you may begin.

Thank you. Hello, everyone, and welcome to Ecolab's fourth quarter conference call. With me today are Christoph 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 at ecolab.com. 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 Form 10-Q for the period ended September 20, 2020, pardon me, September 30, 2020, 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, fourth quarter earnings continue to show sequential improvement despite the negative impact of a greater-than-expected second COVID wave. As earnings per share decline narrowed once again, as we leveraged our new business wins, increased customer penetration, and digital technology, along with lower costs to show the sequentially better results. As before, roughly 80% of our aggregated business showed good sales and strong income growth. Our institutional division, which is roughly 20% of our current sales, remain the most impacted, reflecting the effects of COVID-driven restrictions on global restaurants and hotels. But we also note that institutional is the business that could benefit the most over the coming years as long-term hygiene standards continue to rise. In 2020, we took a number of actions and made targeted investments for post-COVID success. We believe we emerged from 2020 better positioned as our business wins new product development, digital platforms, and our improved field sales force effectiveness should lead to a more effective and profitable Ecolab business. Looking ahead, we expect global efforts to reduce COVID spread and the expanded rollout of vaccines will lead to further global economic improvement in 2021. We believe our strengthened business will deliver full-year 2021 earnings above 2019 results from continuing operations with the first quarter year-on-year percentage decline showing modest sequential improvement from the fourth quarter and the remaining quarters of 2021 showing strong year-on-year growth. In a world challenged by COVID, we saw the value of Ecolab's premium product and service expertise was once again underscored through strong new business growth as well as our strengthened existing customer relationships despite the difficult market conditions. Our position as leader in food safety, clean water, and healthy environments has become even more important. We believe that this position, along with our long-term growth opportunities, remain robust, driven by our huge remaining market opportunity, our leading global market position, our focus on providing our strong customer base with improved results while lowering their water, energy, and other operating costs, and our strong financial position with resilient free cash flows. We believe these sustainable long-term business drivers will continue to lead superior long-term performance for Ecolab and our investors. And now here's Christophe Beck with his comments.

Thank you so much, Mike, and good afternoon, everyone. It's a pleasure for me to lead my first quality conference call as CEO to share with you our results and our expectations for the future. It's no understatement to say that these are exciting times to lead this great company when what we do And most importantly, the way we do it matters more than ever. Ecolab is an exceptional company built on solid foundations and strong values. I've had the chance to be part of shaping where we are today and where we're going tomorrow. So do not expect any sharp turns as I will keep building on what made us strong, resilient, predictable, and successful. The challenges the world faces today are ultimately also long-term opportunities for Ecolab, and I believe that the best is still yet to come. So I look forward to sharing with you our progress and ambition in this and other forums. Now onto our results. Our performance continued to improve in the fourth quarter, in spite of the short-term reversal of global market trends, unlike what we and most actually thought coming out of the third quarter earnings call. COVID cases went up. Lockdowns expanded and restrictions got tighter in most places. For instance, right after our Q3 calls, Germany moved from 40% of restaurants being closed to 100%. And a third of the U.S. states tightened restrictions. Nonetheless, our adjusted EPS continued to improve and narrow its decline, decreasing 15% in Q4 versus the minus 24 in Q3. We could have easily delivered more in Q4. But we decided instead to keep increasing our growth investments in innovation, digital technology, sales capabilities, and backbone infrastructure in the quarter to be ready for the rebound and the opportunities post-COVID. Our consolidated sales trend held stable versus the third quarter, which is a good indication as well that our investment strategy is working. And importantly, our cash flow remains strong and fourth quarter free cash flow improved versus the prior year. Excluding the institutional division, 80% of our aggregated business grew sales 2%, and operating income increased a strong 17%. Health care and life sciences posted 22% top-line growth and a very strong 65% operating income growth. In our largest segment, industrials delivered a robust 18% operating income growth with a modest sales decline of 3%. So while we will keep improving the performance of all our businesses, institutional will remain our primary near-term focus. And here too, progress is being made. While temporary closures and on-premise traffic both got worse in the fourth quarter versus the third quarter in the U.S., our institution sales trends remain unchanged and our margins continue to recover. In 2020, as COVID hit, I believe we responded really well to a unique situation in a global restaurant and hotel industry that's historically been highly consistent and predictable. We protected our team and our business to make sure we were ready to capture the growth when the market reopened. We took great care of our key customers and enjoyed one of our strongest years of both retention and new business wins. We immediately provided all of our customers with world-class scientific expertise and comprehensive programs, like the new no-range range of premium sanitizers. It's a program that kills the COVID-19 virus in 15 seconds. We believe faster than anything else in the world. And we help our customers protect their business while reassuring their guests with Ecolab Science Certified, a new program that has quickly established itself as a leading certification program in the U.S. We've also accelerated the work started a few years ago to continuously augment our critical field sales and service capabilities. We used 2020 to accelerate the implementation of our latest digital field technology. and we expect this technology to further improve our field service effectiveness, customer experience, and operational performance. At the same time, we finalize the fine-tuning of our field sales organization started 18 months ago, so pre-COVID, and we expect this to further increase sales buyer power and drive unit and penetration share gains, as we've mentioned over the past few calls. With all of this, I believe institutional is well positioned to benefit from the markets reopening and from the rise of global hygiene standards. Now, more broadly, we entered 21 in a position of real strength. While we expect COVID-19 will continue to have a significant effect on the economy and our end markets, especially in the early part of the year, we expect to see the beginning of the COVID-19 recovery for our global markets to start in the second quarter. It will then take a few quarters to fully realize the new normal. However, we believe that our strong new business wins, product and service innovation, investment in new hygiene and digital technologies, and successful sales and profit initiative will deliver full-year 2021 earnings above 2019 results from continuing operations. We expect the first quarter to show a modest improvement in year-on-year percentage decline versus the fourth quarter. while the remaining quarters of 2021 will show very strong year-on-year. In other words, 2021 should be a strong rebound for Ecolab. With hygiene standards that are rising fast, we're ready to respond to these new trends with breakthrough solutions and a brand that inspires trust. With water and climate challenges that have just gotten tougher, we're uniquely positioned to help our customers reach the sustainability ambition at a high financial return. And with an unbeatable global team supported by state-of-the-art digital technology, we look into the future with a great deal of confidence. I look forward to your questions.