Ecolab 4Q16 Earnings Call Notes

Douglas M. Baker, Jr.

Energy definitely more positive

“I mean I think there’re two energy markets right now. North America is clearly turning and the rest of the world has not yet turned and probably we won’t expect to see a turn there until the second half of this year. But with that said, I think our view on the Energy business is clearly more favorable than the last couple of years. ”

Going to see price increases, but they lag

“We would expect that you’re going to see a change. We already started to see it in the fourth quarter in some of the businesses. The price lag usually is several quarters for us. And we say within the first 12 months we typically recover the absolute dollar of the inflation in raw materials through pricing, but we don’t recover the margin usually for another year. It just takes a while. We tend to try to go through and do this on a more smooth basis…So I think what you would expect to see this year is we’re going to have some margin pressure from inflation in the first couple of quarters. That’s both raw material increases and the FX hedges unwinding, but it’s going to be offset by pricing as you move into quarters three and four, and that’s pretty much across the board.”

Mining should trip into positive territory

“I’ll address mining first. I think mining improved dramatically throughout the year, but it was still down mid-single digits in the fourth quarter. We would expect mining to probably trip into positive territory, either Q1 or Q2 latest, as we go through this year.”

Border adjustability is a positive for us but we don’t like it because it’s a big bet

“One, I think none of us know ultimately what a tax proposal will look like, and there’s a lot of work being done obviously in DC. Let’s say the Brady Plan with the border adjustability provision was passed. It would be favorable for us. We don’t take any solace in that because fundamentally we don’t think that’s ultimately what’s going to probably get through, but who knows? I think the bigger question is what’s its impact on the overall economy and many of our customers which is also a big concern for us and maybe even a bigger concern. And so we’re also quite hopeful that we’re able to get something done on corporate tax. We’d like a lot of the provisions in what I’ll call the Brady proposal. I’m not totally comfortable with the border adjustability just as a big, big bet on a big piece of our economy and nobody knows exactly how it plays out and that seems to us unwarranted because the other parts of the proposal, we think, are almost guaranteed wins.”

Dairy and agri no longer declining

“Clearly, the dairy and agri businesses, if nothing else, are annualizing and they’re no longer declining. So we think the environment in 2017 is just more favorable than 2016 period for that business. So we would expect the innovation and new business work to shine through in a more effective way. So we see F&B accelerating in 2017 versus 2016.”

Ya clearly seen wage inflation

“I’d say it’s very specific geographically, but certainly, I mean, if you take U.S., yeah, there are certain markets where we’ve clearly seen wage inflation driven by the low unemployment, I mean, including our headquarter market. So we’re in a market here that’s been perennially around a little north of 3% unemployment, but we’ve lived through this for many years in a sense and certainly we’ve seen wage inflation driven the old-fashioned way via the market, and how do we deal with it? Like we deal with all other inflationary items. I mean we’ve got to go price forward.”

Competitors’ M&A is an advantage

” I would say over the years in a number of instances we’ve had situations where competitors go through the distraction of either a large acquisition and/or being sold or bought or whatever you want to call it. In all cases, we do view that as an opportunity, and we try not to miss those opportunities as we move forward. We think the stability that we’ve had as a business in terms of ownership, management focus, and the rest has been a real advantage for us. And we try to make that known how that advantage plays out for customers’ benefit, and certainly we’ll continue to do that”

Opportunity to collect data from customers is huge

“I think the opportunity to use the information that we already capture within customers much more effectively to drive value, merchandise the value we create, develop new opportunities and ways to help customers obviously with their full partnership represents a huge opportunity for the company. Whether it’s specifically monetizing the information, i.e. charging for it or it’s instead used as a means of us better helping customers and being more valuable, I think it’s probably the latter. It’s my guess as we move forward. We’re in early innings. We certainly do it in many instances today, but I think our ability to up our game there is fairly dramatic. ”

The hard part is capturing the data

“So the hard part is capturing the data. Connecting to the cloud isn’t technically very complicated, and that’s the work that we’re doing. And then synthesizing it, rationalizing it, making it valuable for customers is, like, real work, and we’re partnering with some great partners to learn how to do this and improve our capabilities there, which I think we’ve talked about. I mean Microsoft is a company that we’ve been leveraging there in many ways, sales force and other parts of our business, and we’ll continue to do that as we move forward. So I think it’s going to be huge for the company. It will not impact material 2017. I’m not even sure it will materially impact 2018, but in the not too distant future it’s going to be a core way of us doing business.”