Ecolab Inc.

Greetings and welcome to Ecolab's first quarter 2022 earnings release conference call. At this time, all participants are in listening mode. Any question and answer session will follow the formal presentation. If anyone today should require operator assistance during the call, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. At this time, 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 first quarter conference call. With me today are Christoph Beck, Ecolab's CEO, and Scott Kirkland, 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 slash 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 in the release. Starting with a brief overview, continued strong double-digit sales growth driven by accelerating pricing and further new business wins overcame substantially increased delivered product cost inflation and unfavorable currency translation to deliver the adjusted diluted earnings per share gain. Sales were led by double-digit gains in our institutional specialty, industrial, and other segments with attractive growth in all geographic regions. We drove the strong sales performance in a rapidly changing environment where the rise in new COVID infections early in the first quarter slowed the global recovery and further disrupted supply chains, While the war in Eastern Europe later in the quarter exacerbated the supply chain costs and geopolitical uncertainty. Our delivered product cost inflation soared an estimated 25% in the first quarter versus last year and added an estimated 55 cents per share of incremental costs to the first quarter alone. We reacted aggressively and continued accelerating our pricing, which reached 5% in the quarter up from 3% in the fourth quarter. We now look for our structural pricing to increase 6% to 7% for the balance of the year, and when adding in our previously announced energy surcharge of up to 12%, we expect very strong pricing to overcome the substantial delivered product cost inflation. Along with our new business wins, strengthened business portfolio, and improved productivity, we look to realize continued strong top-line momentum for the full year. We expect accelerating earnings growth through the second half, and expect to deliver low change growth in adjusted diluted earnings per share for the full year 2022, understanding there's uncertainty in the timing of the surcharge realization, which will become more clear as we exit the second quarter. This strong business momentum, along with our enhanced value proposition and favorable long-term macro trends, position us well to leverage the post-COVID environment and deliver further superior long-term shareholder returns. And now, here's Christoph Beck with his comments.

Thank you so much, Mike, and good afternoon, everyone. I'm very pleased with how the team continued to execute in Q1. In a rapidly changing environment, we remained focused on what we could control, like new business, pricing, innovation, and exceptional customer service, while we continued to manage extremely well what we could not totally control, like obviously inflation, COVID restrictions, and now the war in Eastern Europe. We started 22 actually with strong momentum as our fundamental business drivers continue to improve, which is most important to me. Fixed currency organic sales growth accelerated to 12%, with 7% of that led by volume gains from strong demand and new business generation. Institutional specialty, as you just heard, led the quarter with 19% organic growth, continuing its strong recovery when industrial further strengthened its already healthy momentum by delivering 12% organic growth, which is even better than what they delivered in Q4. Our margins were also trending very well for most of the first quarter, even ahead of our own expectations, as we were on a path to nicely overcome the significant delivered product cost inflation until the war in Eastern Europe started. As we all know, this had a major impact also on global energy costs, which impacted the last few weeks of the quarter. The spike in costs added an unexpected incremental $0.04 a share in the last months alone, resulting in a total unfavorable impact from delivered product cost inflation of $0.55 per share in the first quarter, close to 70% of our ultimate Q1 earnings. Importantly, we overcame this significant headwind thanks to accelerated pricing, which rose from 3% in the fourth quarter to 5% in the first quarter. And most importantly, we did all this while maintaining strong momentum in demand, new business, pricing, and productivity, the fundamentals of Ecolab. So based on what we see today and the actions we have already taken, I remain really confident in our ability to continue to deliver strong top-line growth and actually keep pricing in 2022 to get ahead of these new energy costs and to see our margins turn positive during the second half to deliver a strong full year 2022, even if the path to get there has now changed quite a bit once again. The unexpected rapid rise of oil and gas costs during the last months of the first quarter will now impact three full months of the second. We therefore had to react boldly, and we did. We decided to implement a global energy surcharge, the very first for Ecolab, which will now come on top of our increasing long-term structural pricing. And once fully implemented, the surcharge should then behave as an offset to what we expect to be short-term but incremental energy cost inflation. Now, we started the second quarter naturally with 100% of the incremental energy cost, but 0% of the energy surcharge as its implementation started on April 1st. Because of this, we now expect the second quarter to see the most acute squeeze in the year between price and delivered product cost inflation. Occurring at the same time, the surcharge is being implemented with customers around the world, but early progress is very encouraging. As the energy surcharge progressively rolls out, we should see the bulk of the surcharge primarily impact the second half of the year and somewhat the second quarter. And accordingly, this initial benefit from the surcharge, along with accelerating structural pricing, strong volume growth, and productivity gains, should help us drive our second quarter delivery with earnings that approach last year's 1.22. And finally, as it's been demonstrated over and over again at Ecolab, when challenging times strike, we make absolutely sure we protect what matters, our people, our customers, and our company. Over the past few years, when we could have reduced our workforce to manage short-term costs, we protected our global team. One of the key reasons why today our customer retention remains so high. We also protected our customers with major breakthrough innovation like Ecolab Science Certified, one of the key reasons why today our new business generation remains so strong. And we protected our company by investing in digital technology, one of the key reasons why today our productivity keeps improving. This approach has also demonstrated over and over again that our model starts generating significant margin leverage when cost inflation stabilizes and structural pricing sticks. So with continuing strong demand for unique solutions that prevent infection and protect natural resources when customers need them the most, we expect organic sales growth to remain in double-digit territory for the rest of the year. We structured pricing rising between 6% to 7% for the balance of the year and an energy surcharge that will progressively act as an offset for the spike in energy costs. We expect operating margin comparison to turn positive sometime during the second half of the year. This should then support our early expectations to deliver full-year earnings growth that reaches the low teens, understanding, as you've heard, that there is uncertainty in the timing of the realization of the surcharge and actually the pace of inflation. But this will become more clear as we exit the second quarter. And also, let's not forget that our full-year delivery includes $0.26 of pure light amortization of 5% of EPS. And as that momentum extends beyond 22, we expect to show Ecolab's hallmark of consistent, superior earnings growth for the many years to come. I look forward to your questions.