Ecolab: Clean Machine - [Business Breakdowns, EP.214]
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This is Matt Russell, and today we are breaking down Ecolab. As of this recording, Ecolab has a $66 billion market cap, so they are a giant in what they do. They protect over 36% of the world's packaged food supply and over 44% of the global milk supply, just to give you some sense of their business. My guest is Todd Wedding, founder of K&A Capital Management, and someone who has a knack for finding these interesting businesses worldwide.

We get into the very on-brand origin story for Ecolab many decades ago, how the business kept that core focus throughout its history, and how it became one of two vendors that any U.S. McDonald's must work with, the other being Coca-Cola. There's a ton of interesting threads in this one, but the opportunity in water is what really grabbed my attention.

It's one of these theses you've heard for many years, and I had never come across a business with the exposure that Ecolab has. So an interesting one to do more research on. Now, please enjoy this breakdown on Ecolab. ♪

All right, Todd, I am excited to have you here to break down Ecolab. You have a knack for finding very interesting that operate in unique corners of the world and the economy. Ecolab definitely fits that bill. So just to kick us off, the introduction to Ecolab, who they are and what they do, and then we could take the conversation from there.

Thanks, Matt. The best place to start with Ecolab is how it was founded, because that is the cultural DNA that exists with the company today. So in the early 20s, a salesman named MJ Osborne was traveling around and noticed that hotels were closing rooms for multiple days at a time because they had to be cleaned and they were using water. And so the

the carpets would get wet, they couldn't turn the rooms and they were just kind of being wasted. And so Osborne figured out that with some chemicals, and he called it absorb it, which is a great name, he could help the hotels turn the rooms faster by making the cleaning process shorter. That saved money for the hotels and it made money for his business. And so we started growing this. And so the name Ecolab comes from economics laboratory. You might think it's eco in terms of

ecology based on where it is today. And that would make a lot of sense, but it actually takes its root in economics laboratory. So saving money and doing it in a scientific way. And that is what Ecolab continues to do today. So it's had many different phases, many acquisitions, many divestitures, but when it comes down to it, that is still what Ecolab does today.

It's very interesting. I did not appreciate the naming origin. I love any type of initial sales process that revolves around, here's a way where what we sell can make you a lot of money. And it's very obvious and upfront. Certainly the case here. Fast forwarding to today, it

it seems like they have their hands in many different worlds beyond just hotel rooms. So is there a way to take a snapshot of where they operate today in terms of segments of the economy and what they do? About 50% of their revenue comes from their industrial business, which they're renaming the water business. That came from the Nalco acquisition, which we'll talk about

About 35% comes from their legacy institutional business, which is cleaning hygiene solutions for quick serve restaurants, hospitals, and so on and so forth. Then you have about 7% in life sciences, healthcare, and then remaining 7% or so in the pest elimination business, which is actually a really great business. It's a B2B business, which they cross sell to their

existing customers. And that's a great steady margin business, 20% operating margins. So we can talk about that too. So they've got a lot of things going on at Ecolab. But again, it all comes back to what MJ Osborne wanted to do from the start. Does it all revolve around chemicals? Or is it broader in terms of cleaning? Like if there were ways to categorize the actual focus of the business, would you use either of those two categories?

Chemicals are really at the foundation of Ecolab. That's going back to Osborne. That's what he started with, figuring out how to use chemicals to solve a customer's problem. Over the years, the company has added new chemical applications. So it made a really big acquisition in the 90s called K-Chemical. And they were the chemical cleaning providers to the quick-serve fast food restaurants.

And that was another really transformational acquisition for them. There, they got the McDonald's business. And what's an interesting fact about the McDonald's business, in the US, McDonald's has two vendors that they have to work with. One is Coca-Cola, the other is Ecolab. That's how powerful the Ecolab brand is in the quick serve restaurant space in the US. Now, the McDonald's franchise is outside of the US. Ecolab's on the preferred list, but they don't have to use Ecolab, but it still tells you

just how strong the Ecolab brand is. And so it goes back to solving problems with chemicals. And one of the major things that they've done over the past couple of years is go from liquid chemical sales to solid chemical sales. And this all goes back to saving customers money. And it also talks about their really big push into sustainability. So if you're a McDonald's restaurant, it makes far less sense for you to have buckets of chemicals shipped to you and stored in clippings

closets because you've got high employee turnover. They can mix chemicals the wrong way. They can cause problems. It takes up a lot of space. And so what Ecolab has done is they sell it in solid form. So you just drop a concentrated dose into your spray can and you can use it that way. They also have hardware installed in some cases where they bring the chemicals. They

in a solid form to the restaurant and the restaurant provides the water they mix together and they can get the dosage that way and so that way you're not shipping water on trucks to get to the restaurants you have the assured dose that you want there's far less safety issues involved so that's just again going back to the solution that eco lab has and they've always had this idea of what's called circle the customer and that's one of their core principles is get all

Get all the way around the customer, try to figure out what their problems are, how can we solve them? Let's take it back to the R&D lab, let's figure out a solution, and let's distribute it to our whole customer base. Just thinking about how that can impact so many different pieces of the business and weight and storage makes a lot of sense. In terms of size of the market, is there any way to capture...

how big it is and how big Ecolab is in terms of fitting in. I think the McDonald's point makes it clear in terms of them being a leader, if not the leader. But how would you go about framing it just from an industry perspective?

The opportunity is pretty big. So right now they have about $16 billion in revenue, and they see an opportunity to cross sell another $55 billion into their existing customer base. Wow. And then an additional $81 billion into the untapped market where they have no presence.

One of the issues that I've always had with Ecolab in terms of thinking about their TAM is that they work really well with large multinational companies or regional or national companies, but their value proposition isn't quite as strong with small mom and pop restaurants. So if you're running an independent restaurant here in town,

And Ecolab comes in with a 20% premium price, which is generally what they have. And it's like, hey, we can solve problems for you and save you money. But when you're trying to make ends meet as an independent restaurant, you're just trying to hit margins and you're trying to figure out, okay, how can I do this as cheaply as possible to stay in compliance? And so

They don't sell that well to independent mom and pop places. Now, they might be able to sell you on their dishwashing, and that's sort of how they get their foot in the door. What they do is they lease dishwashers to the owner and then sell the chemical. That's how they get entry into a lot of these places. But it's really more challenging for them to make a good pitch to smaller mom and pop shops. The opportunity with the Nalco acquisition is probably a good opportunity to step back and talk about

the Nalco acquisition. So in 2011, they made a really transformative acquisition.

The backstory to Nalco was they were working with mostly heavy industrial. So think about water solutions, chemical plants, pulp and paper was another big business energy. And so trying to help them figure out their water usage. And that asset had been passed around quite a bit. They actually had a very similar origin story as Ecolab. They grew up in Naperville, Illinois, founded around the same time. Later

Later on, Ecolab would say, these guys were our long lost brothers and we brought them back into the fold. The backstory there is they were passed around. They were once owned by Alcoa. They were owned by Suez at one point, who is a current competitor. Suez got into financial trouble. They sold it to a private equity consortium, which LBO'd Nalco in 2003 and settled them with a ton of debt. And

And so by 2010, the company had a single B credit rating, was really struggling. At the same time, you had Ecolab, who was trying to figure out where's the puck heading next. And it was a really genius move in hindsight. At the time, I was a little concerned about why they did this, because they had this really nice razor and blade business model with low volatility. I think the beta used to be 0.6 or something, a very

steady business, recession resistant. And they went out and made this large investment. That's about 30% or so of their market value in Nalco. What their vision was by Christoph Beck, who was then executive vice president at Ecolab, and Doug Baker, the CEO at the time, was that water is the future. Is that water purification, essentially, like cleaning of the water that would otherwise come out of the taps with some type of mineral inequality?

That's part of it. So they don't work in municipal water at all. So these are mostly situations like mining and downstream oil and gas and paper and pulp. So you think about paper and pulp. I used to cover the paper and pulp industry when I was at Morningstar. And you see these huge vats where they're bringing in this pulp. They're processing it to be recycled. And there's huge, huge amounts of water. And when you think about the amount of water that's being processed...

both on the industrial side, as well as the food and beverage processing, and increasingly in data centers and semiconductor creation. One new fab, semiconductor fab, uses the equivalent drinking needs of 17 million people.

So it's huge, huge amounts of water to produce the semiconductors and data centers talking about cooling, 40%, 50% of the water evaporates. We only have a limited amount of fresh water and not all of it meets the standards for every need. Depending on where you live in the world, the water chemistry could be different.

The genius move there was noticing that there's this huge tailwind behind water in the coming years, that the cost of freshwater has been rising and Ecolab can use its R&D, its expertise to improve that for everyone. So reduce water needs to recycle water needs and to conserve water, making sure that we're not wasting the freshwater that we have because the tailwinds behind freshwater demand are only increasing with population growth increasing.

increased food needs, and so on and so forth. So Ecolab has come up with a lot of solutions to address those issues. In many ways, it's obvious how that blends into what they were already doing in terms of chemical usage that might speed up that process, make it more efficient. On the other hand, it seems like the customer base would be very different. So just from a synergistic standpoint,

standpoint, especially in hindsight now, given this was done close to 15 years ago, what was the outcome of that in terms of their ability to obviously, it sounds like, improve the R&D process and use some of their expertise there. But more broadly, how did these two businesses end up fitting together? The entree, so to say, for Ecolab was the food and beverage business. So Nalco was working a lot with food and beverage processing plants. So think about breweries, food processing. So

So they touch on 36% of the world's processed food. So they are involved at some step in 36% of the world's processed food. That's a huge opportunity. And so they had a lot of existing relationships in the food and beverage industry through their hygiene and sanitation practices.

And so now they could go into an existing customer and cross-sell Nalco water. Hey, we can help you with treating your boiler to make sure it doesn't have any fowl in it, that it doesn't destroy your boiler and you're using more energy, using more water to hit your solution. So that is the real entree into that. And then once they got into that, they could begin to use some of Ecolab's expertise to apply to the other industries. And

And what Nalco really brought to the table was this product called 3D TraceArt, which is employed in industrial water processes. And it reads what's going on in the water system at all times. And so it shoots that information back. And then you can imagine Ecolab taking that information and saying, hey, we can come up with chemistry to help you figure out how to

Reduce the fallacy in your system, improve your water quality, reduce water usage, reduce energy uses, and so on. Very interesting. It brings up a point on all sides of the business. Do you have a sense of when they're working with a customer, whether it's McDonald's, a brewery, a mining operation, who is the buyer of Ecolab's various product segments, offerings?

It's not obvious that it would be the chief revenue officer or the CFO, but do you have a sense of who is in charge of what Ecolab dubs for various businesses?

It varies by the business for sure, but it's really coming down to the person who's responsible for the expenses and sort of the long-term project revenue or the return on investment for the project, because that's what this is. And actually, Ecolab has a new formula that's based on the ROI that it provides to

the customer. And that's one thing it's moving towards is more of a value-based pricing model, where it can now go to the customer and say, look, we've saved you this much money. We've saved you this much on energy. We've saved you this much on water. Here's our pricing. Instead of just raising it 1%, 2% a year, as it has historically done, it can now go and say, here's the value opportunity. So the decision maker varies between food and beverage and mining and

It really comes down to the person in charge of making that investment in Ecolab, because that's really what it is, that it's an investment. That makes sense. It's a good opportunity to bring in a bit more on the revenue discussion. You tapped into it a little bit there, just in terms of the pricing mechanisms. But how does the company operate? Is it

contracts? Is it just volume based in terms of what they're selling? Sure, there's going to be some variance depending on what it actually is. But do you have any snapshot of what that looks like? It does vary, but it's usually about three to five year contracts. And if there's a chemistry component to it, there's an estimate of how much chemistry is being used

And then that gets deducted from the usage over time. So that's typically how Ecolab structures these. And from an economic mode perspective, even though they're three to five-year contracts, the switching costs are so high. In fact, with the data centers, they're installing a lot of this stuff when they're building the system or the data center and the fabrication plants. It's already being built into the system. And there's zero appetite for downtime once things get going. And so they can really name their price.

They try not to, right? They want to make sure they stay with the customer long term. But when you're a global company, when you're a multinational company, whether it's food and beverage production, whether it's data centers, whether it's fabrication plants, you want to work with a company like Ecolab because they have a global reach. I mean, there's 48,000 employees. 28,000 of them are sales and service people. There are 170 countries. They're all over the world. If you work with Ecolab in the United States, you know you can work with them in other parts of the world.

They just have their hands everywhere in the world in terms of their ability to address customer needs. Yeah, I'm sure that extends both for international expansion and thinking through that or even just new problems that arise and knowing you might be able to find a solution in terms of what Ecolab can offer. On the sales process and one of the things you brought up was the dishwasher example with some restaurants, mom and pops, or even it sounds like...

Having some type of software that can monitor inside a brewery what's happening. It sounds like there's some connectivity to hardware in these places. Is that a common thing for all of their customers that they have some equipment that is obviously going to make the switching cost really challenging? But can you just talk to that strategy a little bit?

Yes, that's increasingly been the case. And that's another fortunate byproduct of having these solid chemicals instead of selling the liquid chemicals into the food and beverage space and the restaurant space. A lot of times they come in, they'll install the hardware into the McDonald's. And if there's a new restaurant, like a new Shake Shack being built, they'll have it installed already. And so the idea of switching it is so hard. And in addition to the hardware, the

They also have these deep personal relationships with their Ecolab salespeople. The really good field service folks are the ones who build these relationships with people in their region. So once you've established that relationship, Betty or Joe, whoever your salesperson is, becomes part of your business and part of your process. And so

To switch out Ecolab means Joe and Betty aren't coming by anymore. They're friends of mine. And so it's a really strong sales culture. That is, if I had to define their culture, some companies are engineering focused. Nalco certainly was more engineering focused. Ecolab is very much a sales oriented business. In terms of the swings that you can see in revenue, you gave me some sense with the beta back when post-financial crisis, which suggests that there was some strength

in the operating performance through that period of time. But how sensitive are they to just general economic factors? Does usage end up resulting in major swings to the revenue base? Or is there anything else that results in revenue volatility in periods of macro weakness?

So we haven't seen a real strong recession with Nalco under Ecolab's wing. So they brought on Nalco in 2011. So after the recession from the financial crisis, COVID, there was a big shock, obviously, to hospitality and to food at the restaurants. So there was a strong about 25%, I think, organic volume decline during that period on a year-over-year basis. But that's to be expected. And it recovered very quickly. So I don't hope not to see another situation like that.

But overall, the organic volume and pricing growth has been very steady, especially for the institutional business. When I look back at the Nalco business, there was a bit of a shock in 2009. But the adjusted EBITDA margin, they had a big impairment that year, so it wasn't apples to apples. But their profitability didn't decline as much as I would have expected it to. Even though the cyclicality of Ecolab has increased, but

with the acquisition of Nalco, I do think they are recession resistant. They did spin off. They made another acquisition two years later in 2013 of a company called Champion, which was an oil and gas focused business. Did not work as well as they expected. And they eventually spun it off into the company that's currently called Champion X. They took some of the upstream that Nalco had and combined it with this business and spun it back off. There was not an impairment related to that.

Even though I thought it was kind of a bad decision at the time, because that's when everyone was kind of rushing into energy investments. With hindsight, they handled it about as well as they possibly could. Yeah. Speaking of cycles. Exactly. That's one sector that certainly has them. And you mentioned a little bit about the steady state on pricing looking somewhere between 1% and 2%. Do they have a general model or framework for thinking about what organic growth can be year to year?

using that volume plus price? So they're targeting 5% to 7% revenue growth every year, or at least their long-term average is what they're looking for. And I think they can take about 2% to 3% price every year. They used to take 1% to 2%. And I think coming out of COVID and this recovery, they started to notice with inflationary pressures, we can take a little bit more. Perhaps we were providing a little bit too much consumer surplus to our customers and recovering some of that

They're trying to get back to their operating margins at 20% by 2027. They're well on their way. Most of that's going to come through gross margin, through pricing, a little bit on SG&A, but most of it's going to come through pricing. And where is it today out of curiosity versus that 20% target? They're not too far off now. They're approaching that number. I think at the last time I checked, they

They were about 18% for their operating margins. So they're getting much closer to that. And I'm expecting them to get there when they expect to in 2027. And is that a reasonable mature state 20% operating margins? Is there much runway post that? How would you think about it on a steady state basis?

I think that's probably a good steady state to start. Some of that could change if we have a real push into the water business. If the water business does pick up the way I expect it to, you could see a little bit more operating leverage, but there's a lot of variable costs in this business. So it's not going to have a ton of operating leverage related to it.

And then just thinking about how much of this is converting into free cash flow, can you talk a little bit about that in terms of earnings conversion, any unique free cash flow dynamics with the business, none immediately come to mind? And then we can talk about capital allocation. They target about 90% to 100% free cash flow conversion. So it's a very free cash flow generative business and kind of dovetailing into capital allocation. They've raised their dividend for 33 consecutive years. It's a very strong cash flow business.

It hasn't been an issue even in recessionary periods of free cash flow has continued to be generated. On the M&A front, there's obviously some history of large strategic acquisitions. Is that always a piece of the DNA? Are they always out there looking, even if it's not quite that size, for attractive bolt-ons or anything else along those lines?

So M&A is certainly part of their DNA. Their capital allocation from a share repurchase standpoint, they're not really opportunistic. They're just buying roughly what they're paying out in dividends every year. They're buying back. And so it's about 50-50 split. M&A is always on their mindset.

They'll tuck in things once in a while. I do not expect them to do anything the size of Nalco. They have been very strong in saying that culture comes first. They don't see any large companies with the culture that Nalco had that they thought they had a nice relationship with that's available. So I would expect them to do more bolt-ons than anything else. One of the things I do like about them as well is they are willing to take advantage

a divestiture. A lot of companies will try to make something that's not working, kind of hold onto it too long. Any investor knows how that feels, holding onto something, just hoping it comes back. But they are quick and open to divesting projects that just aren't working. And I think that's a really good sign of good capital allocation. I agree. It's one of the things that I often look for of, if M&A is in your DNA, do you also look for opportunistic divestitures? Because I think that can just show a signal to the market that you're thoughtful on both sides of the equation. Yeah.

In terms of the competition, are there any players that match the same scale from an offering perspective as Ecolab? And then I guess make it a two-parter here. Who do you think of as the key competitors for Ecolab, even if that means looking at individual segments?

The legacy institutional business. So that's the cleaning and hygiene. And that's where most people are familiar with going and getting your hands sanitized and seeing an Ecolab sign. That's usually where you feel that or sense that brand more than anything else. Again, most of our things are happening behind the scenes in that space. Their major competitor there for a long time has been Diversi, which is now a unit of Solanus. And Diversi has been passed around quite a bit. Let's put it that way. Over the past 25 years, I believe

It's about six or seven times ownership has changed hands. And they're a distant second. They're not anywhere close to Ecolab, especially in North America. Diversity is stronger in Europe. They have some legacy contacts there, but they're not a really good competitor to Ecolab in that space. They're kind of a distant second. So there's really no major competitor that I worry about in the institutional side. On the industrial side, the competitors are people

people like Suez and Veolia, who have a long history of working more with industrial and energy companies. I do think that what Ecolab does have an advantage on there, again, is more on the innovation, on the R&D, on the ability to generate the economies of scope from their R&D that they're doing anyway, and putting it into that system. I think that's their key advantage. And they're holding up just fine. When Nink Nalco had about a 20% market share

when they were bought. It's higher than that today. I don't know exactly the number, but they're still a very strong competitor. I think we tapped on a bunch of the growth opportunities and just the numbers that they referenced in terms of potential runway slash TAM that they would be going after. But are there key segments that stand out? You mentioning data centers that just feels like

This massive program that's going to be going on, the CapEx needs are huge. It's going to take a long time to roll out. There's going to be all this derivative spending that goes into it, Ecolab being a piece of it. But are there certain pieces of the business that really stand out from the growth perspective and the impact that that could also have in terms of moving the needle? I think overall, it's just the water trend. That is the common thread through all of this now. About 70% of Ecolab sales touch water.

in some way. You think that water is just this free commodity and it's becoming increasingly expensive, especially in places where there's a lot of water stress, like the American Southwest, for example. And yet data centers are being built there and need to be cooled and need to use a lot of water. That is certainly what their focus is, is figuring out how do I maximize water? Even a regular restaurant dishwasher can use tens of thousands of gallons of water, this one restaurant. So

So there's a ton of need for this. And in fact, I think Bill Gates actually believes in this too. And so Bill Gates through Cascade and the Bill and Melinda Gates Foundation bought a huge position in Ecolab in 2012. So not too long after the Nalco acquisition.

And I believe they kind of share that vision given Bill's focus on global water supply. They increased it in 2022 as well. They currently own about 12%, 13% of the shares outstanding. Bill Gates is the number one beneficiary listed in the proxy statement.

Yeah. Gates, I know, is quite a popular figure in the water space. Michael Burry from the Big Short, also a big water guy. And I saw it firsthand in the oil and gas space. It's easy to forget about how much goes into that. On that point, and just the point of chemicals broadly, there's obviously exposure to the pricing of these commodities, the access and everything that goes into that.

How are they able to manage that? Is it simply passing through those impacts onto the customer? Is there anything else that they do?

So they have listed in their annual report that they source 10,000 types of raw materials. Just a huge, huge amount of raw materials. A lot of SKUs. A lot of SKUs and the largest accounts for 4%. So it's very fragmented, very diversified. And they've spoken on conference calls in the past that we can't really tie it to any particular type of chemistry or material to really say, hey, look out for phosphates or whatever the price is on that. That'll dictate our margins.

Everything is very spread out. One of the things that you've seen, certainly since COVID, is an increase in the commodity prices across the board. And so that's another reason why their margins have been struggling a little bit in the past couple of years is that they have not been able to catch up to pass that on until the contracts are renewed and renegotiated. And they've been able to push through this value-based pricing to show, hey, we're really delivering you a lot of value. And so we're going to raise your price to a 3% instead of 1% to 2%. Historically, hearing that,

where they could be in a period of time where they're exposed to the commodity price, but unable to pass that on would make me way more nervous than it sounds like the ultimate impact has been. They've just been able to manage that effectively over the years where their sourcing capabilities and broad exposure and effectively pricing contracts is able to navigate that otherwise underlying risk.

Yes. It just may be a bit delayed as they renew contracts and renegotiate. That's where I would say short-term investors maybe get a little nervous and long-term investors can see opportunity knowing that Ecolab has these switching costs and they have these great business relationships. They're saving their customers so much money and there's such strong demand for water that they're going to bounce back. It just takes a little bit of time. You just have to be patient. And so

If you look at the long-term history of Ecolab, I think in the six decades that they've been public, they've averaged ROE of 20%. In the past couple of years, it's been a little off because of the acquisitions and then COVID, but 20% is kind of their bogey and that's where they've been for a very long time.

And in terms of any chemicals business, I tend to think about risks that we've seen historically with the likes of a DuPont or others, where it ends up being environmental issues. Oftentimes, it's dated back in history. Has that ever been an issue? And just in terms of thinking about the managing of the environmental concerns around chemicals, how do you view that as either a risk or not?

That's always something that could come up. I've covered companies with asbestos liabilities and they own the company for three weeks and then they sold it. They still have that liability. So these things can happen. I do not worry about that quite as much with Ecolab and it's because they are so focused on sustainability in general. I think that's become a negative connotation here in the past year or so, and especially in the US with ESG and sustainability. But Ecolab is all in on that and

Outside the US, it remains extremely important. Ecolab is very focused on making sure that what they're doing has positive social environmental benefits. And they have won a ton of awards around that. That's their main focus. And so I would be surprised if they let a risk like that slip through. Certainly possible, but that's a risk.

I'm just curious, you might not know this, but were they considered an actual ESG candidate for portfolios given that focus? Oh, yes. They're included in things like the water ETFs. That's their main focus. But clearly, especially in the past couple of quarters, has not been a tailwind to the stock price. Yeah. It's always interesting to know those dynamics and where companies end up falling on the spectrum in terms of the grading and whatnot.

The last thing, hearing about all their different exposures, the one I wanted to ask about was general customer exposure, revenue exposure with a business like McDonald's. Does that make up a large percentage of their overall revenue? And are there other customers or even if you want to say like segments that would represent revenue risk or concentration risk? Does anything stand out? It's a pretty diversified business.

So there's no major customer where if they lost the contract, it would have an impairing effect on their ability. Now, if they lost somebody like McDonald's, that would obviously be a huge blow to

their confidence and reputation. I think the biggest risk to Ecolab given their lack of competition in some of their spaces is Ecolab. Can they maintain this culture of delivering results when they are on the mountaintop? That's the concern that I have as an investor is,

Are they going to be able to maintain that esprit de corps? I think they only have about 4,000 of their 48,000 employees in the St. Paul, Minnesota headquarters. And so being able to control or influence, I should say, the employees that are scattered about all over the world, making sure they're all united in their focus and their cause, that's hard to do. And Ecolab does have a great culture and they've done a great job of doing that.

But anytime there's a CEO transition, you always kind of worry about in the back of your head, is something going to change? Is the CEO going to come and try and do something transformational, try to disrupt the blueprint for success that they clearly have?

Yeah. Can you talk a little bit about some of the historical CEO transitions? It sounds like you had someone in place during the 2011 acquisition that is no longer there, but how large of an impact do the individual CEOs have? We have obvious icons where their tenures are represented by great shareholder returns, and then we see this transition to a different operational style. Is that the case with Ecolab, or is it more of a

company culture that persists through time? Ecolabs had seven CEOs in their 102-year history. There's not a lot of turnover. First two were MJ Osborne, the founder, and then his son, EB Osborne, who ran the company up until 1978. There were two CEOs who had less than 10 years after that, but Doug Baker was there for a very long time. He only ran the business about 17 years. So

He started in 2004, ran it to 2021. Only 17 is not bad. Only 17. When you think about the median S&P CEO at five years, so that's a long run. So Doug Baker did a great job. He was the one that spearheaded the Nalco acquisition. And then Christoph Beck has been the CEO since 2021. Christoph is a very passionate leader and does a very good job of

spreading the word about what Ecolab stands for, particularly around sustainability. He's a native of Switzerland and came up through Nestle and joined Ecolab in the mid-2000s and came up. And he was really the organizer of the Nalco integration. And by all accounts, it was a textbook integration on how to bring in two companies with a long history, how to integrate them together.

And so he got the tap on the shoulder when it came time to buy the trip with a new CEO to come in. In terms of the market perception of the business, you've made a few references to short-term versus long-term investors and how they might look at things. But is there a general framework that's typically used for Ecolab just from a valuation perspective? Ecolab never looks cheap. There might be a few times once in a while in a market panic where it

It gets down to its low trading range and its PE, but typically it's in that 25 to 30 times earnings. It's because it has 90% of its revenues recurring in some way. It's consumable. It's a subscription. It's something. And so the other 10% are just equipment sales, selling mops and buckets and things like that.

But 90% of that business is just recurring. And they've got such a strong moat in that space that it's really a duration question. We talked about how over six decades of being a public company, 20% ROE, any value investor worth his or her salt is going to expect that ROE to revert to a mean at some point. And yet they just keep beating the fade. And that's why the ROE is so high, like a company like Fastenal comes to mind as well.

or CentOS 2. They keep beating the fade and investors expect that to happen. And obviously the risk is if that does happen, the multiple contracts and the stock goes down. But I don't think that's going to happen.

Yeah, I know exactly what you're describing in terms of it never quite gets there. But there's usually a reason why that's tied to operational performance that has persisted for a long time. It's a different category than the pure growth stocks that trade at these valuations because you're looking three or four years out where they grow into it. This almost feels like it's a steady state because it's delivering a different type of result. Is there anything else that we haven't touched on just either...

upside considerations or downside considerations that are particularly relevant.

I think the opportunity that might be underappreciated, especially by American investors, is the water opportunity, the sustainability angle. Again, I think that's lost its appeal at ESG sustainability label, but the climate needs are obvious and you don't have to believe certain things to acknowledge that there is a ton of demand for water coming in the next 10, 20, 30 years.

whether it's from industry or from food consumption, just looking at the numbers, the population is supposed to grow 25% or so by 2050. How are we going to feed everybody? We have to use more resources and that means more water, which means more business for Ecolab. And so if I think investors aren't getting something about Ecolab, it's not believing in what their value is when it comes to delivering, saving customers,

money from energy savings, water savings, and conserving the environment. As much as it's been a theme probably for 15 years at this point, it still feels like an under-the-radar theme for the masses in terms of water's importance. So I think it's fair to hammer on that point.

and certainly one where I haven't had an appreciation for where you can reflect that view in the market. And it's interesting to get the Ecolab story today. We finish up these conversations with lessons that you can pull away from the business and potentially apply elsewhere. What stands out from Ecolab? For Ecolab, there's a lot of different lessons I've learned from following the company for a long time. But the core one goes back to how we started this conversation.

is see an idea, listen to your customer, figure out what their problems are, go back to the lab, figure out how we can solve that customer's problem and then scale it. That's what Ecolab does. And because it has all of these relationships now, it can say, hey, look at this McDonald's restaurant. It's best in class. Now everybody kind of get in line with that. And here's how we can help you do that. So it's finding solutions to problems. And if you can find one for one customer, I bet you there's dozens and hundreds and thousands of other customers who need the same help.

Yeah, it's certainly a strong case. And I've seen that in a lot of software solutions. You'll hear the description of it. We've covered some of those companies in the past. But this is kind of a great example that you interact with on a daily basis. And then it extends well beyond what I see in my consumer life. So this has been a pleasure, Todd. Thank you for bringing this one to us and breaking it down. It's been an enjoyable one. Thanks, Matt. It's been my pleasure.

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