Ecolab 3Q16 Earnings Call Notes

Ecolab (ECL) Q3 2016 Results
Douglas M. Baker

Headwinds are easing

Look, my headline would be solid quarter, headwinds are easing, and we believe we’re in a good position as we close out the year. So let me go through each of these briefly.

Currency has stabilized, but modelling another 7% full year challenge next year

“FX is easing. So in our first quarter, FX was a 14% headwind, and it’s roughly a 1% headwind in Q4. We assume we’re highly unlikely to see another 7% full-year challenge in 2017. Energy is stabilized. The market only stands still here, it will likely or should be an accretive year even in those conditions for us in 2017.”

Do believe that raw materials will move up next year

“I’m really not that nervous about what we believe is going to happen in the raw material markets which we believe raws are going to move up next year, but we do believe we’re going to move up in a fairly orderly fashion as we go. But we have that fully forecasted in our business.”

Raw materials increases wont be a theme for next year though

” So raw materials, we’re forecasting we’ll start moving kind of enterprise-wide in 2017. They’re going to remain favorable in Q4 year-on-year. They’re just less favorable than Q3. And there’s a minor step up if you will, sequential, from Q3 to Q4. So we’re starting to see these. At this point in time, I think we’re going to be able to keep our nose above water certainly for the year in 2017. I can’t tell you if there’s not going to be an issue in one quarter, but I don’t think this is going to be, by any means, a theme for next year.”

Heavy side of China is hurting

“The other market you mentioned is China, and that’s really, pain we feel on the heavy side of that business. And that’s a reflection of steel, overcapacity, some being taken offline, mining, also in China. And also somewhat paper. Our paper results globally were positive, but they were much more positive than that if you took out the mining or the China results. And ultimately we look at that we’re going to start lapping those comps starting a little bit in the first quarter next year and really fully after the second quarter next year. And so we look at that as an improving situation as we move through 2017 as well.”

Europe is clearly not robust

“Yeah. I guess what I would comment is on Q3. And what we’re – I mean, Europe is clearly not robust. I would say, I would have described it in the first half as probably stronger than I expected. I think in Q3 it was as strong as I expected or as weak as I expected going in. So I’d say there’s been some downtick in the economy there. It hasn’t fallen off a cliff. And I would still say the environment is, if we do our job and continue to drive new business and keep our existing customers, drive mix in the other things that we have in our toolbox, we should be able to continue to show growth in that market, which is what we anticipate being able to do.”

QSR struggling but we help save cost

“Currently, it’s not a perfect top-line environment for those businesses, and they’re having real cost pressures underneath, particularly from both wage and also benefit pressure, i.e., ACA. And so we’re doing a lot of work there trying to help them take labor out of those businesses because they have to given this environment. And so that will offer us new technology for us, but it’s a huge financial benefit for them. And that’s how we’re looking at that market and why I still am quite bullish on our ability to continue to grow in QSR going forward.”

Energy is going to start moving from a headwind to a tailwind

” I think the story on Energy is it’s been a dramatic headwind for us over the last, if you will, six quarters, seven quarters. We’re now starting to enter a period where we’re going to start lapping, and it’s going to quickly move from a headwind to a tailwind, almost under any normal scenario. If you don’t believe oil is going to decline further from here, all it does is stabilize. I think it’s accretive. If it happens to start picking up, it’s going to be more accretive as we go forward”