Q1 2022 Ecolab Inc Earnings Call
Yes.
Starting with a brief overview continued strong double digit sales growth driven by accelerating pricing and further new business wins overcame substantially increase 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 this strong sales performance in a rapidly changing environment, where the rise of 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 and estimated 25% in the first quarter versus last year and added an estimated 55 per share of incremental cost 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 a 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 improve productivity. We look to realize continued strong topline momentum for the full year, we expect accelerating earnings growth through the second half and expect to deliver low teens growth in adjusted diluted earnings per share for the full year 2022 understanding there.
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-19 environment and deliver further superior long term shareholder returns and now here's Christophe Beck with his comments.
Thank you so much Mike and good afternoon, everyone I am very pleased with some of the team continued to execute in Q1.
The rapidly changing environment, we remain 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-19 restrictions and now the war in Eastern Europe .
We still think 22 actually with strong momentum as our fundamental business drivers continued to improve which is most important to me.
First currency organic sales growth accelerated to 12% with 7% of that led by volume gains from strong demand and new business generation.
Institutional and specialty as you just heard led the quarter was 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 bring on a pass through nicely overcome the significant delivered product cost inflation.
Wrong in Eastern Europe started.
As we all know it had a major impact also on global energy costs, which impacted the last few weeks of the quarter.
The spiking cost added an unexpected incremental four cents a share in the last months alone, resulting in a total unfavorable impact from delivered product cost inflation of <unk> 55 per share in the first quarter close to 70% of our own.
<unk> Q1 earnings.
Importantly, we overcame significant headwinds thanks to accelerated pricing, which rose from five from 3% in the fourth quarter to 5% in the first quarter and most importantly, we did all this while maintaining strong momentum and demand new business pricing and productivity. The fundamentals if you cut out.
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 accelerated pricing in 'twenty two to get ahead of these new energy cost and to see our margins turned 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 sector.
We therefore had to react boldly and we did we.
We decided to implement a global energy surcharge, the very first for ecolab, which did not come on top of our increasing long term structural pricing and once fully implemented the surcharge didn't behave as an offset to what we expect to be short term, but incremental energy cost inflation.
Now we start in the second quarter.
With 100% of the incremental energy costs.
But zero percent of the energy surcharge as it implementation started on April one.
Because of this we now expect the second quarter to see the most acute squeezing 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 rolled 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 surcharge along with accelerating structural pricing strong volume growth and productivity gains should help us drive our second quarter delivery with <unk>.
Earnings that approach last year's $1 22.
And finally as it has 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 cost we protected our global team one of the key reasons why today, our customer retention remains so high.
We also protect our customers with major breakthrough innovation like Ecolab Science certified one of the key reasons why today, our new business generation remained 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 our 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 Europe 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.
Issued and support our early expectations to deliver full year earnings growth that reaches the low teens understanding as you have heard that there is uncertainty in the timing of the realization of the surcharge and naturally the pace of inflation, but it will become more clear as we exited the second quarter and also let's not forget that our full year delivery includes 26.
Sense of pure light amortization of 5% of EPS and.
And as that momentum extends beyond 'twenty, two we expect to show Ecolab Hallmark of consistent superior earnings growth for many years to come.
Look forward to your questions.
Thanks, Chris that concludes our formal remarks as a final note before we start Q&A, we plan to hold our annual tour of our Booth at the National Restaurant Association show in Chicago on Monday May 23, they have any questions. Please contact our office.
Operator would you. Please begin the question and answer period.
Thank you we will now be conducting a question and answer session.
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One moment please poll for questions.
Thank you. Our first question is from Tim Mulrooney with William Blair. Please proceed with your question.
Yes. Good morning, just one question from me today Christoph on the delivered product costs. I know you said they were up 25% in the first quarter can you just talk about how inflation trended.
Through the first quarter and through April and then how youre thinking about that progression through the second quarter.
Hey, Thank you Tim Great question actually will become experts at this.
If I may say, so and it's important to step back probably pick is when we look at 2009 2021, sorry. So last year was the first half of the Europe . There was almost no inflation it was close to 1%.
And then the third quarter as we remember so I'll move to 10% for us of delivered product costs, which represents our 25% of our sales.
As you know and then in Q4, so it doubled to 20% and the full year salt was 10% of inflation for ecolab. So far for 2021 and now so to your point in Q1 2022, we're expecting kind of.
The same as in Q4, so the 20% will it move to 25% because of the.
The war in Eastern Europe that started at the end of February and we're expecting initially Q2 to be the same as Q1 or Q4, so 20%, 20%, 20% and ultimately we ended up with 20% in Q4 25 in Q1 30 expected in Q2, so when you're talking about.
April saw its trending towards <unk>.
<unk> second quarter of 30%, which we expect that for the full year.
We should end up with 25% inflation for the EPC. When we were thinking initially that it would be 15% and to put it in perspective, Jim just to conclude here.
That will represent roughly a $1 billion over 18 months.
We will have to overcome which we have overcome saw the part of 'twenty, one last year and delivering.
<unk> growth the same in Q2 as well and we'll do the same as well for the quarters to come in 2022.
Okay.
Very helpful. Thank you.
Thank you Tim.
Your next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you Christoph looking at Q2 guidance. If you look at the various puts and takes of volume and pricing et cetera.
Can you discuss why we only approach last year's dollars 22.
Secondly, what drives a strong.
Earnings growth in the back half of the year.
That's a big question David but.
So one by one so forth.
Q2.
If I may well the situation changed obviously, so when the world started at the end of February because the first half of the first two months of Q1.
We had a great start we were trending really well both in terms of top line momentum you've heard some of these 12% organic growth driven by 7% volume and 5% price.
While at the end of February things changed.
So we went ahead of our expectations. We were getting ahead of DPC inflation, and we're expecting to deliver a strong Q1 and really get in a very good position for a strong Q2 delivery that was before the war started at the end of February so when the <unk> started.
We obviously saw.
The impact on the energy cost, which triggered that surcharge that we've talked about where we had just a few days basically to decide that globally all businesses all countries will move together.
In order to so to compensate for this additional energy cost as you've heard before so these months of March added <unk> <unk>.
Two hour delivery and for the second quarter, what do you get three months of <unk>.
That the abuse Lee and trending up.
Fortunately so it will all depend now as I mentioned in my opening remark on the speed at which we.
We can deliver.
Surcharge.
Which is going well, but it's a complicated exercise. It's a 40 end markets. It's 170 countries around the world we want to make sure that all customers are aligned with it as well.
Order to have the right obviously revenue recognition, we're going to make sure. We don't have collection issues as well. So it's hard to know exactly how the timing is going to be so im having Q2, basically with 100% of the headwind and the surcharge that's progressing during the quarter. How do you know exactly where we're going to end at the edge.
End of the quarter, but I think we're going to get darn close to where we were last year and honestly, if I get to 95% of where I was last year I'd be happy with it but we will do our utmost obviously to get as close as we can.
The first brought a few question.
Second so for the for the full year.
With our ambition so to get towards the low teens, which obviously saw requires a strong second half well think about it. So we have strong momentum, which always helps obviously, 12% driven by high demand. The price is really good. So we have 5% that's been accelerating during the <unk>.
First quarter, moving towards 6%, 7% without losses of guesstimate as all major losses, as always onesie, twosies, but nothing major as well we have productivity that <unk>.
<unk> better as well you've seen that in our results for Q1 over 100 basis points of improvement. So we have fundamentals that are in very good shape. Then we have the surcharge that's coming almost 100% so for the for the second half. So if you get the fundamentals plus the surcharge realization.
And also expecting that inflation will plateau and ease at some point as well during the second half well, we should end up in a very good place from a margin leverage perspective, but that all depends on the timing for us on the execution of the surcharge, which is hard to totally predict and second how inflation is going.
Evolve, but if things happened well will end up so in the right place with a very strong second half that im sure about it where we end up for the full year exactly that's harder to tell but it's just a matter of one month or two plus or minus at the end of the year, that's going to bring us to the final result, but.
At the end of today.
David what I'm truly trying to drive here is to have the right fundamentals that ultimately in 2003, we ended up in a place where we get the high margin leverage that we all looking for starting in the second half and then getting even better. So for 2023. So the 2.2 parts a few questions here hopefully I could address.
And then just quickly on the surcharge how quickly is it designed to roll off.
If and when oil prices to ease off as well.
It's a good question that's something.
We will have to discuss with customers I don't think that it is going to happen overnight.
But it is taking a few months to implement it is probably going to take a few months to roll off as well whenever that's going to happen.
Thank you.
Thank you David.
Your next question comes from Manav Patnaik with Barclays. Please proceed with your questions.
Thank you good afternoon, Christoph I just had a big picture question from you in terms of outside of.
Obviously, the inflation pressures you talked about just curious if you're starting to see any macro pressures, maybe specifically in Europe , given all the press around it.
Yes, good question.
So generally so far so good but we all reading the newspaper and looking at the news Abusefully. So when I think in terms of demand for what we do.
It's very strong.
All companies have made sustainability commitments.
No and they need always more of our services in order ultimately to deliver.
On the sustainability commitment on the other hand, as well from an infection prevention as well food safety.
Covid or whatever else that can be as well.
Our customers article was more so from what we're doing so we don't have a demand issue.
We're really strong trends, which is really good so far we haven't seen a perceived.
Any slowdown with two exceptions.
The first one is institutional.
Strength in the hotels, but especially the restaurants. So we thought that it would open up quicker during the first quarter and continue on.
That trend during the second quarter, while it's been slower from a market perspective than what we were expecting so is that as an outcome as well as the economic pressure at the beginning up to you. It was related to omicron, obviously, but now is it because of interest rate and price of oil and so on.
You'll see that so that's that's one small indication in the second one is China.
Because of the Lockdowns over there that are more extreme than everyone was expecting at 4% of our company. So it's a good news bad news sometimes.
Wish it would be much bigger.
Today Im happy, it's only 4%, but thats, probably there that we might have as well some darkening clouds.
Hopefully not but that could happen otherwise.
Fall. So good the last thing I would mention Manav is probably <unk>.
Currency.
As you know so the dollar is strengthening.
Were expecting so.
Roughly 10 cents for the full year and it's doubled.
As we speak right now so I would imagine that that's going to strengthen as well so might become as well a further headwind.
Got it and maybe maybe just asked another way like maybe near term medium term longer term.
Demand is not an issue like do you plan on changing your sales force growth strategy at all.
I want to make sure I understand right, what you're saying, Okay. What did you say sales force growth.
That would be hiring more people.
Hiring increase given all this demand out there.
Yes, great question Okay.
Got it Manav, so, yes and no.
In the past.
I'd say pre digital times.
Our growth was almost directly correlated to our growth of our field sales force.
That's changing.
Over time, it will still keep growing but not at the same pace as it used to over the last 98 years of the 99 years that we've been.
In business because digital automation is obviously, helping us out to make a lot of transactional work that our teams is doing today like driving.
Bunch of stuff you can do so with remote monitoring.
Preparation as well of sales goals you can do much more so on the computers now and we've implemented all that over the past few years as you know.
It requires less homework as well to get ready for customers fixing equipment.
As well, we can do that remotely so theres a bunch of stuff that we can automate so through digital technology, which will disconnect to a certain extent so the growth of the company and the growth of the field force, which drives as well so SG&A productivity.
Got it thank you.
Thank you Donna.
Your next question comes from the line of Steve Byrne with Bank of America. Please proceed with your questions.
Yes. Thank you.
Better understand this energy surcharge.
Is it defined by.
Oil natural gas or electricity or does that depend on your customer.
And just want to make sure I understood you correctly about the inflation you're expecting in the second quarter.
If I understood you correctly.
Youre looking at a 30% inflation, maybe 20% from raw materials and 10 from energy that I hear you right and if so are you.
Are you getting any pushback on.
Energy surcharge given it's roughly.
Twice the magnitude of your structural pricing.
Increases.
So good question, Steve two parts the first one.
Announced that two customers.
Around the world.
Our global surcharge for the whole company all customers all.
Industry is old Gantries.
Round the world It gets implemented slightly differently.
Business by business then after world think about pest elimination is very different than the heavy industrial business like paper for instance, but the general principle is yes.
Related to the price of oil and what we've said is that the surcharge will be between eight and 12% can go higher than 12, if the oil price gets higher but 810 and 12 are related to oil pegs that we've defined as well so with customers. So if the oil price goes further up the energy.
<unk> surcharge. We go further up we wanted to have it temporary mechanical formulaic as well that customers. So know how it works when they get it how much it is when it gets off as well that's the theory. The practice is obviously a little bit different.
As mentioned before so pest elimination might be different than the heavy industrial business, but generally we discussed with all customers so to get it right, making sure that it is an offset to the energy increase or energy cost increase that we have in our P&L and so far it's gone.
Quite well.
Customers around the world. It's early we've been three weeks at that so it started April one, but so far so good it's going to take a few months to finalize as well so.
I'm quite happy with the progress, we're making right now, but there's still some work that remains in order to get to the right place I might pause here just to make sure that I'm not.
Addressing your question.
No no that was helpful.
I'd also ask you about the pure light acquisition, you got a four months under your belt now.
Anything surprising you anything.
Going slower than you expected or anything.
That's a positive surprise.
Well all of the above progress.
Progressing well with all the usual challenges.
M&A integration.
Was a family company.
Call It a big start up as well. So then suddenly you ended up.
Larger corporation with processes practices with organization and all of that obviously these are.
Some friction that needs to be aligned, but we had a very good place.
As a team.
You probably know that our leader.
<unk> is a general manager who comes from Ecolab seems to two brothers retired or 80 years old are quite.
That was very natural so we have a team combined from former ecolab, former pure like people and people coming from ecolab as well from a performance perspective.
<unk> was growing double digit.
As we took it over in 'twenty, one it will be growing double digit in 'twenty to what's important to keep in mind is that the first half of the Europe . We are capacity constrained. So the demand is higher than the supply. We can provide which is the reason why we are building a new plant in.
Pennsylvania and extending another one in the UK as well and that's going to come online in the second half of the year or so we're going to have kind of this pattern of double digit last Europe kind of slower growth in the first half this year much higher growth in the second half of this year and then after the races by 20 <unk>.
Capacity has been such a.
A big driver that we had opened in order to grow further but last but not least the more we look at it.
More.
It's it's an unbelievable industry.
Biopharma, it's huge it's growing really fast it's something we can address these very few competitors that can do what we can do as well.
Have really saw technology that no one else has in some cases as well and what I like the most is that we can build a lot of things around it to really build that growth platform. Like we did 20 years ago with pest elimination and all the businesses that we have in the company 10 years ago.
Water that came as well so around food safety and hygiene at Ecolab and now we have.
<unk> that can serve the life science business, but also.
The industrial businesses to which we can add as well some M&A down the road, which makes it even more interesting so all in all.
Would do it again.
Thank you.
Our next question comes from the line of Ashish <unk> with RBC capital markets. Please proceed with your question.
Thanks for taking my question I just wanted to focus on the industrial segment, you saw some pretty broad based acceleration there across water and food and beverage and downstream I was wondering if you could talk about.
What kind of momentum do you see going forward and how much was volume versus pricing driven.
Great. Thank you Ashish.
Industrial is in a great shape.
It's all about the company as you know they've been growing 12% organic.
In the first quarter of this year versus.
Versus 7% in Q4 by the way, 5% was volume 7%.
<unk> was price.
What I liked the most is that we have exploration so on all fronts.
Water moved from Q4 to Q1, so 8% accelerated to 11% F&B was at four is now about 10% paper was at 15 remained strong at 16% and downstream, which has been stuck for two years ended up to Europe at 8% and 16% in this.
First quarter as well and what's really interesting is that there are some new engines as well in the area as we call them like global High Tech with data center is growing fast as well chemical industry as well, which is the new business that we've created in animal health as well, which I kind of those future growth businesses that are ad.
So to the momentum of that.
That group, which is doing really well broad based all businesses most countries around the world in China, a little bit more tricky for the reasons I mentioned as well before but otherwise in a very good shape and I will just end up on margins as well for that and industrial which is always a question when margins were down 10 <unk>.
In Q1, but it is important to keep in mind, there were up 19% versus 2019, so before.
Colby strike as well, where industrial is really shown ultimately how do they behave during inflationary time that was pre abuse at this cycle that those 17 18 cycle ended up great margin improvement in 2020 and that cycle with very good pricing as well will end up into margin leverage down there.
Road as well as it did in the past and gets up in terms of margin ratio as well as we go through each of those cycles.
That's very helpful color and maybe if I can just ask a question at a high level on the volume side, obviously very strong momentum in volume.
But as you go through the rest of the comps get a bit tougher maybe on the institutional side easier on the healthcare side, but you should start to see some of the benefit from better benefit from reopening. So how should we think about the volume trend at a high level across the company.
Overall, roughly the same for the reasons you mentioned.
So I'm going to turn more positive and some are going to slowdown for Colm question.
As you mentioned, but generally so top line is going to remain in double digit territory.
And the volumes are.
We kind of remain for the most part similar that's assuming there's no recession are big.
Obviously, the event happening out there, but otherwise I think it's a pretty steady momentum that we have across the company.
That's very helpful. Chris. Thank you. Thank you Ashish.
Next question comes from the line of Chris Parkinson with Mizuho. Please proceed with your question.
Great. Thank you so much Chris.
Just take a step back over the last few years, obviously, there have been a lot of ebbs and flows during the COVID-19 situation or whatever you want to call. It.
You had launched a bunch of new I would say products that more likely programs in food safety standardization. Among many other verticals when you sit back and think when the management team about share gain potential kind of where you are and where you could be just is there any difference in how you would peg your growth.
I will go for the institutional portfolio or pieces of industrial versus the market versus peak and peers versus let's say a few years ago. Just how has that thought process evolved. Thank you.
Yeah, Great question Chris.
Generally we definitely gaining shares.
We compare abuse Liza always our.
Growth with competitions grows and I guess you do the same so we way ahead. So most of them we have some weaknesses, sometimes that we recognize and deal with.
Obviously, but I feel good in terms of shares that we gaining across the key businesses across the key countries. If you take institutional as you mentioned for instance, as well it's.
It's interesting to take one fact since you know institution in the U S is so big.
It will take.
Our restaurant business in institutional sales in Q1, but at the same level as they were in 2019, so pre COVID-19 .
While the dine in.
In restaurants is.
5% down.
So 2019 folder reasons, we know staffing and all the staff that are begging restaurants, LTM lately, but we back to 19 when the traffic in restaurants is a third down versus 19, well thats showing so how much.
Sure we gained as well in that specific example of institution and I could cover other businesses as well.
Got it.
Very quick follow up on health care.
You mentioned in the supplemental.
<unk> momentum with elective surgeries in the U S offset by a slow recovery in Europe , but.
The competitive dynamic kind of vault. There also during the Covid situation. Some of the HBC has got a little bit more aggressive can you just talk about your strategy there a little bit more once again, where you stand today and what you. How you believe your position for growth and just comment on where.
How the street should be thinking about modeling that over the next let's say two years. Thank you so much.
Thank you Chris.
Interestingly enough so before COVID-19 .
The major cause.
Vergence of focus in.
<unk> was towards surgical.
So operating rooms central sterile.
Patient rooms, so really saw that centered around the operating room.
<unk> I believe was very small strategy and it didn't come from me. So I take no credit about this one but I think the company saw did it really well except that during COVID-19 .
So got shut down postponed and it happened so a lot of time, so on and off which drove everybody nuts, obviously in the industry and that happened again, so over the last six months with omicron. So it's the right long term strategy, Chris I have zero doubt about that because it's ultimately making sure.
Will you protect patients from hospital acquired infection, which is good for patients. It's good for the hospital because they reduce their total costs and they can operate as well so more often which helps because they don't need to repeat operations.
They have done as well in the past so strategy was right.
For the future. It's just got a lot of ups and go over the last two years, which was related to those elective surgeries that have been so kind of shut down and restarted.
Thank you as always.
Thank you Chris.
Next question comes from the line of Josh Spector with UBS. Please proceed with your question.
Yes.
Yeah, Hi, Thanks for taking my question I, just wanted to follow up on the volume outlook kind of for the rest of this year and specifically in institutional and just wanted to think about it business travel improvement is something that becomes a meaningful kind of flex point for your outlook. So lodging room still hasnt recovered, but arguably that.
More leisure versus business travel I think your exposure hotel and regional wise will be more skewed to the business side. So do you think that improves and is that baked into the second half outlook at all or is that a source of upside versus your current thinking.
So business travel is is a small part of.
<unk> of our business, but it is impacting our business or our lodging business, which is roughly 6% of our company.
As you probably know so, but we're taking obviously so any app.
In the market.
Out there I think it's.
For the full year.
We're going to have a lot of puts and takes there.
He's going to be some upside with with travel as you mentioned so leisure.
Getting better we feel it in our end markets business driver is going to ramp up as well in the months to come but on the other hand.
I think that there will be some economic pressure as well on most people in the U S and in Europe , as well driven by the price of oil interest rate subsidies you name. It the beauty that we had during COVID-19 , that's going to go away as well and we can feel as well as the industry can feed already.
There is some pressure there so I think it's going to be some good news.
That's good news, but we'll see what's really going to happen over the next few months that I call. It the influence the only thing I can influence your.
Your business.
In your business and institution that has been doing extremely well actually said during the pandemic and its continuing to do it right now as well on top of the pricing that they get Inc, which is driving share as I was mentioning to Chris as well before.
Ultimately I think that institutional he is going to be in a good place.
One might say, we could have grown even faster if everything would have been unleashed at the same time as well well that's not the way things work. So generally the industry might slow down a little bit.
We might not grow as fast as we would have wished but we would still remain.
In double digit territory in 'twenty, two which I believe it is a pretty good performance.
Okay. Thank you.
Thank you Josh.
The next question comes from the line of Vincent Andrews with Morgan Stanley . Please proceed with your question.
Thank you and good afternoon, everyone. A couple of quick ones for me.
The release mentioned in food retail.
Because of staffing issues that some of the cleaning intensity decline can you just clarify is that staffing issue is that because in the quarter. There was kind of COVID-19 related outages, when amacrinal surging or is that because.
Customers are struggling I'm, just trying to understand how transitory the issuers.
Yes, it's an interesting one vincent because for the most parts of the retail industry is doing quite well, especially the large customers the large retailers.
<unk>.
Serving around the country and around the world.
The trick is that they are all struggling with.
How much people they get obviously in their stores so they need to choose whether people are going.
So did they go and serve customers.
They do as well as much as they should so on.
The cleaning side as well I want to be careful what I am saying that obviously, because we make sure that our customers are doing things the right way.
But in normal times, they would do much more than what they're doing today and it's all related to the staffing that theyre shifting from one part of the store towards the commercial run which is driving their states as well.
Okay, and just as a follow up Scott if I could ask you about.
Sort of how you expect working capital trend through the year, obviously in an inflationary environment youre going to need youre going to need more of it but.
It looked like a pretty good build in the quarter and you finished the quarter with a low cash balance. So just how should we be thinking about working capital and free cash flow for the year.
Yeah. Thanks Vincent.
And as you mentioned in the quarter there was a bit of a build as you would expect so free cash flows were in line with what we expected for the first quarter and really just below last year, because we built working capital and Capex, which you would expect as sales are growing, especially the strong and so as we look for the year on a free cash flow basis expect that for the full year, we would have free cash flow is really.
In line with free cash flow conversion historical levels, which means that our working capital will sort of trend in line with the business growth.
Okay, great. Thank you very much.
Our next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Thanks, very much good afternoon, Chris that following up on the industrial segment.
Just curious.
In the press release, it's tightened unfavorable mix as a headwind could you elaborate a little bit on that please and just discuss where that's going and then.
Follow up and there is a discussion earlier on industrial about segment margin.
Yeah.
Few years ago was in.
Pre pandemic in the mid teens.
How quickly could the margin get back to that level based on what you're seeing thank you.
Yes, Thank you Scott.
A few question of business margins and mix.
So if I took up the overall margins.
Usually it takes two years to kind of get through.
Margin cycles, our inflation goes up.
And you get the pricing we get the dollars back the first year in the second year.
We get the margins back and more and that's how we've grown our margins in.
In industrial so at every cycle and it's going to be the same in this one with one big difference is that usually the inflationary cycle. So lost much less time this time.
We're already planning for two years last year and this year. So the cycle is going to be a little bit longer but.
Very strong price muscle in.
In industrial.
For a few reasons.
First speakers.
Our premium product.
<unk> competitive so versus competition in terms of what they can deliver so customers are interested in paying more to get more as well out of it and second we have a pricing approach, which is driven by Roy as.
As you probably know which is basically getting a share of the savings that we are generating for our customers as well. So it's kind of a very natural organic type of pricing as well. So the underlying pricing and then you have the inflation with pricing that comes on top of it so.
Online should be towards so 23.
Assuming that the inflation obviously.
Peaks now and eases in the quarters to come.
In 2003, so we should really see that rebuild and step up in margins in.
Industrial <unk>.
Second question.
First one was the mix.
There is three things.
One is business mix.
Paper for instance, so growing faster than light water paper or is it lower margin unlike water.
That has an impact in the mix of businesses within the business.
Can take downstream for instance.
We have an important offering which is called additives that energy companies are using usually when the prices of oil are rather high because they can't afford it when those loans are growing really fast right now they have lower margin than the chemical offering that we are providing so to discuss tumors and the last one.
The country mix.
As well, depending on where you grow.
That has an impact as well on the overall margin of industrial jobs. Those are the three big drivers of this.
<unk> mix.
That's great color. Thank you.
Scott.
Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes, good afternoon.
Christoph coming back to the surcharges that youre implementing as of April one.
And how much might you actually expect to realize in the June quarter. The reason I ask is I think your press release on March 15th indicated a range of eight to 12 and I imagine in some cases, you get the high end immediately.
Cases, maybe the low and still other cases, perhaps you have some contractual limitations. So perhaps you can talk about the flow through as you begin to implement that program in the second quarter and also into the third quarter.
Yes, so two things Kevin.
And I can explain it in a complicated way on a very simple way.
The simple one and we can get some more details if you wish so.
But the way we.
We agree and align with customers in such a short period of time is really to make sure that the surcharge is an offset to the.
Increase of commodity costs related to energy cost.
So you get a net zero.
Ultimately.
Our EPS delivery, but if we don't get the surcharge, obviously, we have a negative EPS delivery because we get.
The inflation and we don't get the <unk>.
Jobs. So that's the way we think about it really that the surcharge is a natural offset so for the increase related to the energy cost. So that's the first one in the second and I'll pause after that so just to make sure that addressed.
Your question here.
The second quarters, ending June as you say.
What is the transition quarter, because obviously, we start from zero on April one and we hope to be as close to Jennifer.
Cruising speeds.
In June or July , which is why I'm not perfectly accurate on where we're going to be.
The end of June because there's a lot of realization that needs to happen for.
Thousands of customers millions of locations around the world in 170 countries. This is real work.
All being very nicely very well like the progress that we're making but it's an imperfect journey.
Obviously since we've never done it as well so that's the way we think about it in terms of net impact and upset and second for the second quarter, while it's that's going to be a straight line to heaven, but it is going to end up in a good place sometime this summer I don't know if its going to be exactly at the end of June when the quarter ends.
Okay. Thank you for that and then secondly, I wanted to ask you about your institutional earnings results in the first quarter.
Came in a little bit better than we had anticipated I guess my question is to come in better than you thought internally and if so what drove the positive variance in that piece of the portfolio.
So just to make sure.
You're right. So youre talking about do you want me to talk about sales.
<unk> margin or both.
Yes, I was referring to your operating earnings in global institutional and special Okay. Okay got it.
Well actually so.
Sales were really good they could have been even better.
Omi Crohn's I wouldn't have here so the first part of the quarter.
Andy earnings were.
We're good.
But it's still not as high as they could or should be.
Because they are being impacted as well so by the delivered product costs in.
<unk> so good growth good productivity work you, maybe remember that we've implemented in 2020.
Our global field system.
As well that is really automating a big chunk of the transactional work that our sales force is doing around the world that's driving better productivity innovation is adding to margin as well we mentioned Ecolab science certified these infection programs as well related to Covid.
And then post COVID-19 as well that's all helping on the margin, but the truth is going to happen in the quarters to come and probably as well in the years to come.
Because when all that comes together that the pricing gets ahead as well.
Inflation I firmly believe that the institutional.
Margins will be even better after that cycles than it was pre COVID-19 whenever the policy is going to be the future is going to be but.
But let's assume it's going to be 23, but institution that on a very good path, both in topline and bottom line as well and the best is to come.
Thank you very much.
Thank you.
Our next question is from the line of Eric Petrie with Citi. Please proceed with your question.
Hi, good afternoon, Christophe good afternoon, Eric.
Our underlying sanitizing sales normalizing for the <unk>.
Thousand 19 levels.
Okay.
So thats any perfect science.
Obviously, so it was.
When we look at all the sanitizing sales that we have in the company.
It grew over 50% during the Covid times and the way it looks like right now is that it should remain at roughly 20% above where it was pre COVID-19 , let's call. It 2019.
Helpful. Thank you and then typically your institutional margins over our history are higher than industrial how do you see that as you were talking about mix and so forth 2023, and beyond and some of the growth verticals that you have in industrial as well as net zero.
Yes as mentioned before so institutional is going to be better after that cycle concludes its assumed so twenty-three.
Covid inflation.
All of that it's not all going to happen on January 1st obviously, but post this cycle.
Business performance the P&L of institution is going to be better than it was in 2019, a pre COVID-19 . That's the first one for all the reasons I mentioned.
On the prior question on industrial.
Had a very good journey of margin improvement over the years and interestingly enough also happening during dose inflationary cycles.
The previous one you maybe remember the margin improvement we had in 2020 was growing north of 20% in terms of operating margin and ended up in a very good place, which is why I just mentioned before as well earlier in the call. Even if the margins are down 10% in Q1, they are higher now.
17% than they were in 2019 as well so due to the pricing mix work that the team has been doing so that's going to continue going forward.
You mentioned as well.
Euro is obviously something that was much less relevant.
You years ago, but thats, becoming very relevant right now and going forward because many of our customers have made commitments.
This sustainability objectives, many of them are not progressing as fast as they were hoping.
Bunch of good and less good reasons, sometimes this is obviously driving very good demand. So for US we've created a dedicated net zero division now within industrial in order to serve those customers as well that are the most advanced and those customers tend to be higher margin as well at the same time.
Which will contribute to better margins for industrial which down the road.
I expect industrial to reach the same level of margin than institutional and potentially even better.
Great. Thank you.
Thank you.
Next question is coming from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.
Yeah.
Thank you Christophe good afternoon quick.
Quick question, we had a lot of talk about pricing I wanted to go back a little bit more to volumes and just ask.
Are we on the overall company volumes.
Like for like vis vis 2019 in other words, how much is left in terms of return to normal play in terms of.
Revenue potential like you've talked about.
Institutional.
Being back to where it was but with.
In person dining just down a significant amount and so if you were to put it like to like what would you say the upside is or potential for revenue with just kind of a normalization say coming if you will to assume that would come in 2023.
Yeah, So I have to get to some numbers to get that I want to make sure I get the right. One so from a top line perspective, we way ahead of 2019 already obviously, but you asked the right question. So in terms of volume. So if you look at Q1 'twenty.
'twenty two.
We have businesses that are already ahead of 2019 industrial is ahead.
Life Sciences had our other segment is ahead as well.
Only one debt below 2019, roughly 10% in terms of volume is institutional and specialty and is expected to cross that line. During the second half of the year, where we're going to be in a place where all businesses. All major business will be ahead of 2019 in terms of volte.
During the second half.
Okay. So.
When I'm thinking about.
The recovery you have.
You still have that we should be largely a second half 'twenty two and first half of 'twenty three kind of improvement potential over there is that the right way to think of it absolutely, especially in institutional and specialty no doubt about that that's why we're saying it's going to take it as kind of a two three year cycle.
Where demand is going to be higher just because the industry is recovering.
From a demand perspective, and staffing as we talked about before as well as you get more staffing than hotels for instance, you probably being in hotels lately. So the service is a little bit different than it used to be even though you pick the same prices for your rooms, while it's up because hotels won't inhibit that weighed in on it staffing to do it.
Going to add as well so to the demand for us because those people are using our product that's going to be a good thing that's going to help us drive demand in 'twenty two and in 2003 when it is going to stop I don't know, but I think we had one or two years ahead of us of recovery, which is really good for that business.
Okay, Great and just a follow up question.
One quarter really enough time to get energy surcharge across the expanse of the customers that you guys have.
It just seems like it's <unk>.
<unk> tried to hit everybody at same time people also wanted to make new sales is there a focus being taken off of new sales in order to be able to do this how should we think about it.
Great question.
So first getting it all done in one quarter.
The short answer is no.
And that's why I'm, saying that in.
In theory, if everything were done in the second quarter in a perfect way yeah, we would be growing our earnings very nicely. While it is not going to happen because we started zero on April 1st and at the end of June we won't be 100% done either for all the reasons that you mentioning now thats why its hard to know exactly.
What are we going to be but I know that this summer, let's put it that way we will be.
Very good place because all businesses everyone around the world so needs to get this one done.
That's the right way so exactly for the reasons that you mentioned before and the second point.
Okay.
The prioritization, so new business versus pricing.
We've been reasonably good at that but I wanted to be perfectly honest with you when we focus on pricing, let alone a surcharge, which is something totally new since we've never done that globally.
You get your eyes off the ball.
New business.
So I expect to slow down a little bit to get the pricing right, but that's why we wanted to get pricing done.
As we can to make sure that new business maintained its momentum as well down the road, it's hard to do both at the same time.
Great. Thank you.
Thank you.
The next question comes from the line of Mike Harrison with Seaport Research Partners. Please proceed with your questions.
Hi, good afternoon.
Good afternoon, Mike if I could.
Sorry, I wanted to see if I can attack. This question around underlying market demand a little bit differently, you talked about business travel you've talked about maybe some macro concerns in Europe I was just hoping to get some some color more broadly on what you're seeing in terms of consumer behavior.
Inflationary environment are there any signs at this point that inflation is starting to drag on consumer spending.
That would show up maybe in restaurant foot traffic.
Most of US were not covering this space thought last time inflation was the strong. So I guess any historical perspective, you can provide would be very helpful.
Yes, a few things first that kind of inflation none of us.
Release of experience that I guess are apparent.
It was not in business. So last time, you truly happened here, so 30 or 40 years ago.
So it's totally extreme totally unusual as we all know.
So a few things here.
First we don't see.
A slowdown of demand yet.
So thats a good news.
But if we look at.
Restaurants, especially.
In the U S. If I look at the data that we get from the industry.
You clearly see a slowdown of demand which is most probably.
Related to inflationary pressure because of oil because of the wood because of mortgages you name it but that's very early so those are indications.
Probably so.
Importantly, though too.
To follow.
The third thing and last thing that I'd say as well curious that when we move to a slower times or more extreme.
Cessionary times, which we don't assume it's going to happen in 'twenty two could happen in 2003, who knows obviously that we've gone through many times as a company.
And the good thing with the Ecolab model is that yes, the growth slows down.
But we are still ahead.
The market grows because we gained market share because of all that we discussed before in terms of new business.
Innovation expansion of offering and so on and so that helps us grow faster than the overall market and kind of dampen the recession that you might have on our top line and most importantly in more difficult times for our customers they need us more because our value proposition as you know it's healthy.
Customers get better results at a lower total cost that's been true for 99 years as a company. So in more difficult times potentially recessionary times customers need even more what we're doing which has been so reasons why ecolab has been doing so quite well during <unk>.
Floor or recessionary times.
Alright, thanks, very much for that and then.
Second question on the.
Hi Tech opportunity I believe that's mostly centered around water and going into semiconductor fabs as well as data centers can you talk a little bit about your market position there.
Particularly now that you've combined with pure light and are you in a position to win more than your fair share of opportunities as we see some of this fab capacity expansion. Thank you.
Absolutely, it's a it's a fascinating business, which used to be part of light industries our water.
A business that we're serving.
Hotels like manufacturing.
And so on and now we've created a dedicated division.
That combines.
Data centers and microelectronics, obviously, they're related but different.
The main driver for data centers is to help those high tech companies reached their net zero ambition and.
I mean, you know all of them they've all made.
Old commitment that by 2034, most of them they are going to be zero or positive carbon and the same for water as well. We're the only company that can provide that to them. So that's obviously something we have to get organized in order to get there and we're making very nice progress by working with those large.
<unk>. This is ecolab at its debt because we serve enterprise customers for a very long time for amphora.
Actually and we help them understand where are they today, how much water did they use what's your objective to get to zero, what's the roadmap to get there and drive execution as well to what's that while we make sure that we maintain a 99, 9% uptime. So for all data centers den.
Microelectronics just to conclude on that is.
Is different but related we won't need to have the same people because it's the same type of expertise that we need.
In the field well it is.
Production of microprocessors and that requires high purity of high quality water.
Which to a certain extent we were doing in the past ecolab, but we could not do the highest quality of water that's being used in the production process of microprocessors. This is something that we can do now with pure light, which is a new offering that no one else can offer as well, which is helping not only pure.
Light, but our global high Tech business, so kind of the beginning of the journey, but so far a very good story, where I think that we in a position that we could truly own that market.
Thank you. Our next question is from the line of Rosemarie more value with Gabelli funds. Please proceed with your questions. Thank you good afternoon, everyone.
Yes.
Hi.
I was.
I was wondering if you could touch on the progress you are making on life Sciences I believe we did not really catch on that particular part of your business during the call.
Yeah, Great question, So life Sciences.
It's been a great business that we started I think five years ago 2016.
With Doug we did that so again I'm not going to take any credit for that.
Been a great business, that's been growing to almost $300 million today growing double digit.
Some of the highest margin that we have in the company.
It's a business that's doing well.
Hard comps.
Versus 'twenty, one and 'twenty because it was such a.
Our crazy high growth that that business went through we saw related to COVID-19 .
Covid demand, but the underlying growth of that business. So it's double digit and we'll emerge as double digits.
In Q2, Q3, I don't remember exactly and we will continue so very nicely as well as a business on top of it.
<unk> life Sciences.
Former ecolab, if I may say.
So providing solutions to make sure that the production lines clean rooms factories.
Were safe and.
Protected from any infection risk now we add pure light, obviously to it which is purifying the product that's being produced in those production lines. So it creates a one plus one equals three.
Type of proposition like water and food safety, when we acquired nalco as well so.
It's going to help life science grow even faster today together, so it's kind of.
$7 million to $800 million growing double digit.
We are constrained by capacity right now as mentioned earlier on the course of the first year first half of this year roughly but the demand is just getting higher <unk> business is doing really well getting together the offering is even more interesting, we just need to be able to produce.
Selling and Thats going to happen so during the second half of this year.
Are you signing up.
Launch from that facility.
We do that's why we focus on so life Science was Murray is.
Is 80% plus former.
And the balance is cosmetics.
The traditional brands.
Life Science for the most part is is pharma with now a renewed focused on biopharma.
<unk>.
Monoclonal antibodies, which is really the industry within pharma, that's growing the fastest and expected to be 40% of the overall pharma market by 2026 of 2027 signed the next few years, it's really interesting.
Okay. Thanks, and then I was wondering given the stock price decline, which continue today.
Are you considering accelerating repurchase.
Well, it's what we've announced a few a few weeks ago.
Or a month ago I don't remember exactly the timing, maybe Scott you want to give some perspective as well on that sure Rosemarie.
We announced in March that we are repurchasing $500 million of shares during the year and through Q1 as you might have seen that we purchased a little more than half of that and we will continue at the pace that we're that repurchase program, depending upon market conditions, but also maintaining our commitment.
To return to a range credit metrics by the end of next year.
Any way.
So nothing improve any way you can expand that 500 million.
We need to wait until next year before you.
They look at it.
I think we'll keep pace on that $500 million. This year again as I mentioned I want to make sure that we're committed to returning to these.
A range level metrics by the end of 2023.
Okay. Thank you.
Our next question is from the line of Andy Wittman with Robert W. Baird. Please proceed with your question.
Okay, great. Thanks for taking my questions I guess I just wanted to follow up on the.
The earlier question around free cash flow I think that question was centered more around working capital and you said it would be kind of like historical levels, but Scott.
It looks like if you back into.
Your EPS guidance into net income kind of walks back up to around $1 5 billion of adjusted net income historically I guess you guys have said about 95% is a good way of thinking about.
Kind of free cash flow for ecolab, So is that applicable for this year with.
A higher than average growth rates and inflation.
That's the other way of kind of asking that question, but is basically then thats actually going to about $1 $4 billion of free cash flow is that the right kind of order of magnitude and can you just comment again.
If you could on the Capex budget for the year as well.
Yes, just on your first question, Yes. Your math is about right in that mid 90 range, which is our historical cash conversion. So that would be where we would expect the year on free cash flows to be and then as we think about capex talked a little bit about this after the fourth quarter and we will expect capex to return to sort of our historical levels, which is like five five.
5% to 6% and as you're probably aware about half of that Capex that we do is merchandise and equipment, which is that customer locations and so that will grow as the sales grow and as new business growth.
Thank you.
Our final question is from the line of Kevin Mcveigh with Credit Suisse. Please proceed with your question.
Great. Thanks, so much hey, Christoph I wonder.
Any.
Client reaction to the price increases I know you were thoughtful through COVID-19 or are they more accepted giving how.
Thoughtful you work through the Covid process or just any puts and takes I mean, obviously everyone's seeing a lot of inflationary pressure, but just any thoughts from a client perspective.
Yeah.
I'm.
Really pleased with what we've done in pricing so let's keep in mind.
We have to overcome a 1 billion dollar over $1 billion over 18 months, so starting some mid last year towards.
And <unk>.
This year. So 18 months is a very short period of time as well and we want to make sure that we do that.
In achieving two things the first one is that we.
Stay youll get to the head of the inflationary curve, we've done it last year, we'll do it as well so this year as mentioned so.
We were on a path to be now basically ahead of the inflationary curve in 2022 that was pre war in eastern Europe now it's postponed a few months, but we add the energy surcharge to that and we get to the right place.
Well so it is on one hand, making sure we cover inflation and at the same time that we do it in a way that we grow our margins as well down the road. The second objective. We have is to make sure we're not losing customers, while we do that it's not 100% play.
Obviously, but that we can that we can maintain 90% plus of our customers, which we're doing we haven't lost any major customers. So while we were doing that because we need to keep in mind.
We are a growth company I want to make sure we keep our organic momentum which is extremely strong right now why did we get the pricing right. While we keep the customers because down the road. That's the beauty of the economic model. When you fundamentals are right of new business innovation of pricing.
Customer retention and that inflation is is you get a very significant windfall in margin, which we know always happens. The question is when is it exactly going to happen, but so far so good I am very pleased with what the team has been doing in terms of pricing, while keeping our customers and driving growth at the same.
Right.
Thank you very much.
Thank you Kevin.
Thank you at this time, we have reached end of our question and answer session. I will now turn the floor back to Mike Monahan for closing remarks.
Thanks, Rob that wraps up our first quarter conference call. This call and the associated discussion slides have been available for replay on our website. Thank you for your time and participation and our best wishes for the rest of the day.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.