Ecolab Inc. (NYSE:ECL) Q3 2023 Earnings Call Transcript October 31, 2023
Operator: Greetings. Welcome to Ecolab’s Third Quarter 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations for Ecolab. Thank you, Mr. Hedberg. You may begin.
Andy Hedberg: Thank you, and hello, everyone, and welcome to Ecolab’s third 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.
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Christophe Beck: Thank you so much, Andy, and welcome to everyone on the call. “Building on our momentum with strong and reliable growth.” That’s the headline for Ecolab third quarter. Thanks to exceptional execution by our team, Ecolab delivered a very strong quarter as our momentum continued with 7% organic sales growth, which was actually exactly as expected and 18% growth in adjusted earnings per share, reaching the high end of our expected range. Against unpredictable macro conditions, we drove continued strong pricing, new business, accelerated volume trends and continued robust margin expansion. Our focus remains on offense, which we are best at, continuing to fuel strong and consistent double-digit earnings per share growth.
We maintained strong organic sales growth with pricing increasing by 7%. This increase reflects both, the value-based pricing we put in place last year and the new pricing we’ve implemented this year, reflecting the enhanced value we offer to our customers. Our volume trends continue to strengthen as well, which is great news, with new business helping to accelerate volumes despite softening in global end market demand. Organic operating income margin continued its impressive expansion, up 160 basis points compared to last year, reaching 15.5%. This notable progress reinforces our path towards achieving our long-term margin goal of 20%. In the third quarter, our adjusted gross margin expanded 360 basis points to 41.3%. This strong expansion is a result of our value-based pricing strategy, improved volume trends and a slight decline in delivered product costs.
While global energy prices remain dynamic, we’re confident in our value-based pricing strategy and is absolutely necessary, our capability to implement energy surcharges. We continue to take a prudent stance on the trajectory of delivered product costs as costs remain up nearly 40% compared to pre-inflation levels. Assuming the current high energy price environment persists and our costs ease only slightly in 2024, we continue to expect very strong gross margin expansion in the quarters ahead. This will help us make progress in achieving our historical 44% gross margin and our 20% OI margin target over the next few years. Underlying productivity also remains strong as we continue to leverage our leading digital capabilities. As expected, SG&A expense was relatively stable versus second quarter levels.
The year-over-year comparison reflects the rebuild of incentive-based compensation, a result of our strong sales and earnings growth and the strategic investments in our growth engines. We also expect SG&A dollars in Q4 to remain very consistent with second and third quarter levels. Our performance further strengthened across our businesses. The highlight was Institutional & Specialty. We grew organic sales double digits and organic operating income, 28%. Organic OI margin was up 260 basis points to 19.3%, approaching its historical 20% level. Our Industrial segment also performed well, especially comparing to an extremely strong Q3 last year, led by attractive growth in Food & Beverage and in Water as our unique ability to bring end-to-end water and hygiene technologies to customers continues to drive strong share gains in this segment.
Operating income growth is the best in the third quarter, reflecting the incentive-based compensation rebuild as mentioned in the last call. And importantly, we expect this segment’s operating income to return to double-digit growth in Q4. Our Healthcare bifurcation strategy is progressing well. Strong pricing and new business had to improve underlying sales growth and operating income. The business also benefited from larger than normal surgical sales, which is not expected to recur. While we are pleased with our progress, delivering sustainable and profitable growth remains a focus for me and for our team. Life Sciences growth also improved to mid-single digits despite continued short-term pressure for everyone in this market as our team continued to win share.
While we expect the market to remain under pressure for the next few quarters, our ongoing investments in additional new product capacity and keen capabilities will allow us to capitalize on attractive long-term high-growth, high-margin opportunities. In summary, in the third quarter, we delivered as expected with strong sales and solid earnings growth. Now looking ahead, we expect our strong performance to continue in the fourth quarter with adjusted earnings per share increasing 17% to 24% versus last year, which is above the mid-teens growth we had guided to during our second quarter call and will bring the full year EPS north of 2019’s EPS. This performance is expected to be driven by new pricing, volume growth and robust gross margin expansion expected to be up 250 to 300 basis points versus last year.
As we shared with you at our Investor Day in September, we see continued strong momentum in ‘24. Even as global uncertainty remains with softening macro demand, we continue to expect mid-teens or better growth in adjusted earnings per share in 2024. As always, we’ll remain good stewards of capital by continuing to invest in the business, increasing our dividend, reducing leverage 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 that Ecolab’s long-term fundamentals are stronger than ever, and I am confident in our outlook for continued strong performance as we work to deliver superior shareholder returns.
So, thank you for your continued support and your 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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