Ecolab：清洁机器——[商业拆解，第214期]

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

Thanks, Zack. 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 1920s, a salesman named Merritt J. Osborn 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. The carpets would get wet, they couldn't turn the rooms, and they were just being wasted.

Osborn figured out that, with some chemicals—he called it Absorbit—he could help the hotels turn their rooms faster by making the cleaning process shorter. It's a great name. That saved money for the hotels, and it made money for his business. So, we started growing this. 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—that is what Ecolab continues to do today. It's had many different phases, many acquisitions, and many mergers, 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 seems like they have their hands in many different worlds beyond just hotel rooms.

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. Thirty-five percent comes from their legacy institutional business, which is cleaning and hygiene solutions for quick-serve restaurants, hospitals, and so on and so forth. Then you have about 7% in life sciences and healthcare, and a remaining 7% or so in the pest elimination business, which is actually a really great business. It's a B2B business that they cross-sell to their existing customers, and it's a great, steady-margin business with 20% operating margins. 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 M. J. Osborn wanted to do from the start.

Does it all revolve around chemicals, or is it broader in terms of cleaning? If there were ways to categorize the actual focus of the business, would you use either of those 2 categories?

Chemicals are really at the foundation of Ecolab. That's going back to Osborn. 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 Kay Chemical, and they were the chemical cleaning providers to quick-serve fast-food restaurants. That was another really transformational acquisition for them. They got the McDonald's business.

What's an interesting fact about the McDonald's business in the U.S. is that McDonald's has 2 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 U.S.

For McDonald's franchises outside of the U.S., Ecolab is on the preferred list, but they don't have to use Ecolab. It still tells you just how strong the Ecolab brand is.

And so, it goes back to solving problems with chemicals. 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. This all goes back to saving customers money. It also reflects their really big push into sustainability.

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 closets because you've got high employee turnover. Employees can mix chemicals the wrong way. They can cause problems, and it takes up a lot of space. What Ecolab has done is sell the chemicals in solid form. 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 in solid form to the restaurant, and the restaurant provides the water. They mix together, and they can get the dosage that way. That way, you're not shipping water on trucks to get to the restaurants. You have the assured dose that you want. There are far fewer safety issues involved.

That's just, again, going back to the solution that Ecolab has. They've always had this idea of what's called “circle the customer.” That's one of their core principles: 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 in terms of weight and storage makes a lot of sense. In terms of the size of the market, is there any way to capture how big it is and how big Ecolab is within it? 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. 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, and then an additional $81 billion into the untapped market where they have no presence.

Wow.

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.

If you're running an independent restaurant here in town, Ecolab comes in with a 20% premium price, which is generally what they have. 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. You're trying to figure out, “How can I do this as cheaply as possible to stay in compliance?”

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 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 Nalco acquisition is probably a good opportunity to step back and talk about it. In 2011, they made a really transformative acquisition. The backstory to Nalco was that they were working mostly with heavy industrial customers.

So think about water solutions for chemical plants, pulp and paper, which was another big business, and energy, helping them figure out their water usage. That asset had been passed around quite a bit. They actually had a very similar origin story to Ecolab. They grew up in Naperville, Illinois, and were founded around the same time. Later on, Ecolab would say, “These guys were our long-lost brothers, and we brought them back into the fold.”

The backstory there is that they were passed around. They were once owned by Alcoa. They were owned by Suez at one point, which is a current competitor. Suez got into financial trouble and sold Nalco to a private-equity consortium, which LBO'd Nalco in 2003 and saddled it with a ton of debt.

By 2010, the company had a single-B credit rating and was really struggling. At the same time, you had Ecolab trying to figure out where the puck was 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 6 or something—a very steady, recession-resistant business—and they went out and made this large investment that was about 30% or so of their market value in Nalco.

Their vision, from Christophe 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 the water that would otherwise come out of the taps, with some type of mineral impurity?

That's part of it. They don't work in municipal water at all. These are mostly situations like mining, downstream oil and gas, and paper and pulp. 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 are huge, huge amounts of water.

When you think about the amount of water that's being processed, both on the industrial side as well as in food and beverage processing, and increasingly in data centers and semiconductor creation, one new semiconductor fab uses the equivalent drinking needs of 17 million people. So it's huge, huge amounts of water to produce the semiconductors. In data centers, when you're talking about cooling, 40% to 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 fresh water has been rising, and Ecolab can use its R&D and its expertise to improve that for everyone: reduce water needs, recycle water, and conserve water, making sure that we're not wasting the fresh water that we have. The tailwinds behind freshwater demand are only increasing with population growth, 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 and make it more efficient. On the other hand, it seems like the customer base would be very different. So, just from a synergistic 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 improve the R&D process and use some of their expertise there? More broadly, how did these 2 businesses end up fitting together?

The entrée, so to say, for Ecolab was the food and beverage business. Nalco was working a lot with food and beverage processing plants. Think about breweries and food processing. They touch 36% of the world's processed food. They are involved at some step in 36% of the world's processed food. That's a huge opportunity.

They had a lot of existing relationships in the food and beverage industry through their hygiene and sanitation. 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 fouling in it, that it doesn't destroy your boiler and you're using more energy and more water to heat your solution.” That is the real entrée into that.

Once they got into that, they could begin to use some of Ecolab's expertise to apply to the other industries. What Nalco really brought to the table was this product called 3D TRASAR, which is employed in industrial water processes. It reads what's going on in the water system at all times, and it shoots that information back. 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 balance in your system, improve your water quality, reduce water usage, reduce energy use, 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, or a mining operation—who is the buyer of Ecolab's various product segments and 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 does 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 projected revenue or the return on investment for the project, because that's what this is. Ecolab has a new formula that's based on the ROI that it provides to the customer. One thing it's moving toward 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, and we've saved you this much on water. Here's our pricing.”

Instead of just raising it 1% to 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. It really comes down to the person in charge of making that investment in Ecolab, because that's really what it is: 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 3- to 5-year contracts. 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.

From an economic moat perspective, even though they're 3- to 5-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.

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, data centers, or fabrication plants—you want to work with a company like Ecolab because they have a global reach.

There are 48,000 employees. 28,000 of them are sales and service people. They're in 170 countries; they're all over the world. If you work with Ecolab in the United States, 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 to international expansion and thinking through that, or even just to 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, one of the things you brought up was the dishwasher example with some restaurants and mom-and-pops, or even having some type of software that can monitor what's happening inside a brewery. 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's obviously going to make the switching cost really challenging? 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 liquid chemicals into the food and beverage space and the restaurant space. A lot of times they come in and 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. The idea of switching it is so hard.

In addition to the hardware, 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. Once you've established that relationship, Betty or Joe, whoever your salesperson is, becomes part of your business and part of your process.

To switch out Ecolab means Joe and Betty aren't coming by anymore. They're friends of mine. So it's a really strong sales culture. 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. After the recession from the financial crisis, there was a big shock, obviously, to hospitality and food—the restaurants. 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 hope not to see another situation like that. But overall, organic volume and pricing growth have 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 EBIT margin—they had a big impairment that year—so it wasn't apples to apples. Their profitability didn't decline as much as I would have expected it to. Even though the cyclicality of Ecolab has increased with the acquisition of Nalco, I do think they are recession-resistant.

They made another acquisition 2 years later, in 2013, of a company called Champion, which was an oil-and-gas-focused business. It did not work as well as they expected, and they eventually spun it off into the company that's currently called ChampionX. They took some of the upstream business 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 rushing into energy investments, in hindsight, they handled it about as well as they possibly could.

Yeah. Speaking of cycles.

Exactly. That's one sector that certainly has them.

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?

They're targeting 5% to 7% revenue growth every year. At least, their long-term average is what they're looking for. 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 in this recovery, they started to notice that, with inflationary pressures, they could take a little bit more. Perhaps they were providing a little bit too much consumer surplus to their customers and recovering some of that.

They're trying to get back to operating margins of 20% by 2027. They're well on their way. Most of that's going to come through gross margin through pricing, with 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 the last time I checked, they were about 18% for their operating margin. 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 cost 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? Are there any unique free-cash-flow dynamics with the business?

None immediately come to mind. And then we could talk about capital allocation. They target about 90% to 100% free-cash-flow conversion, so it's a very free-cash-flow-generative business.

Kind of dovetailing into capital allocation, they raised their dividend for 33 consecutive years. It's a very strong cash-flow business, and it hasn't been an issue. Even in recessionary periods, 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?

M&A is certainly part of their DNA. Their capital allocation from a share-purchase standpoint isn't really opportunistic. They're just buying back roughly what they're paying out in dividends every year, and so it's about a 50/50 split.

M&A is always on their mind. 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, and 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 that they're willing to make a divestiture. A lot of companies will try to make something that's not working and kind of hold on to it too long. Any investor knows how that feels: you're holding on to 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: if M&A is in your DNA, do you also look for opportunistic divestitures? I think that can just show the market that you're thoughtful on both sides of the equation.

In terms of the competition, are there any players that match the same scale from an offering perspective as Ecolab? And then, I guess, to 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?

That's the cleaning and hygiene business, 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 or sense that brand more than anything else. Again, most of their things are happening behind the scenes in that space.

Their major competitor there for a long time has been Diversey, which is now a unit of Solenis. Diversey has been passed around quite a bit, let's put it that way, over the past 25 years. I believe ownership has changed hands about 6 or 7 times. They're a distant second. They're not anywhere close to Ecolab, especially in North America.

Diversey 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 on the institutional side.

On the industrial side, the competitors are 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, and on the ability to generate economies of scope from the 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.

I think 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 touched on a bunch of the growth opportunities and just the numbers that they reference in terms of potential runway that they would be going after, but are there key segments that stand out? You mentioned data centers, and 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, with Ecolab being a piece of it.

But are there certain pieces of the business that really stand out from a 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's the common thread through all of this. Now, about 70% of Ecolab sales touch water in some way. Do 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? 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: figuring out, "How do I maximize water?" Even a regular restaurant dishwasher can use tens of thousands of gallons of water—just 1 restaurant—so there's a ton of need for this. In fact, I think Bill Gates believes in this too.

Bill Gates, through Cascade and the Bill & Melinda Gates Foundation, bought a huge position in Ecolab in 2012, so not too long after the Nalco acquisition. I believe they kind of share that vision, given Bill's focus on the global water supply. They increased it in 2022 as well. They currently own about 12% to 13% of the shares outstanding. Bill Gates is the No. 1 beneficial owner listed in the proxy statement.

Yeah, Gates, I know, is quite a popular figure in the water space. Michael Burry from The Big Short is 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?

They have listed in their annual report that they source 10,000 types of raw materials. That's just a huge, huge amount of raw materials—a lot of SKUs. The largest one accounts for 4%, so it's very fragmented and very diversified.

They've spoken on conference calls in the past that they 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 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: They have not been able to catch up and pass that on until 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 2% or 3% instead of 1% to 2%.

Historically, hearing that 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, broad exposure, and effective contract pricing are 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 6 decades that they've been public, they've averaged an 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 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 managing 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 owned the company for 3 weeks and then 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 and 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, that 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, 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 a 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: 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 who are scattered all over the world, making sure they're all united in their focus and their cause, is hard to do. 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 worry in the back of your head: Is something going to change? Is the CEO going to come in, 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 who is no longer there, but how large of an impact did 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 a company culture that persists through time?

Ecolab's had 7 CEOs in their 102-year history. There's not a lot of turnover. The first 2 were M. J. Osborn, the founder, and then his son, E. J. Osborn, who ran the company up until 1978. There were 2 CEOs who had less than 10 years after that.

But Doug Baker was there for a very long time. He only ran the business for about 17 years. So he started in 2004 and ran it to 2021. Only 17 is not bad—only 17 when you think about the median S&P CEO tenure at 5 years. So that's a long run.

Doug Baker did a great job. He was the one who spearheaded the Nalco acquisition. And then Christophe Beck has been the CEO since 2021. Christophe 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 Nestlé and joined Ecolab in the mid-2000s. He came up, and he was really the organizer of the Nalco integration. By all accounts, it was a textbook integration on how to bring in 2 companies with a long history and how to integrate them together, and so he got the tap on the shoulder when it came time for the 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 gets down to its low trading range in its P/E, but typically it's in that 25- to 30-times-earnings range. It's because 90% of its revenue is 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 6 decades of being a public company, they've had a 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.

A company like Fastenal comes to mind as well, or Cintas too. They keep beating the fade, and investors expect that to happen. 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 3 or 4 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, that 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 there's something investors aren't getting about Ecolab, it's not believing in the value they provide when it comes to saving customers money through energy savings and 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 it's certainly one where I haven't had an appreciation for where you can reflect that view in the market. 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: 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 gets 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 there are dozens, 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 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, Chadd. Thank you for bringing this one to us and breaking it down. It’s been an enjoyable one.

Thanks, Zack. It’s been my pleasure.