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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