Demand for a clean and safe environment will remain long after the coronavirus pandemic has been checked by the global vaccine rollout, predicts Ecolab CFO Dan Schmechel.
He says along with the long-term move to greater sustainability, the need for products and services focused on hygiene and infection prevention, will be a feature of society for years to come.
That opinion is borne out by the forward data Schmechel and his finance team have been developing about customer appetite for its range of environmentally-focused commercial products. “The demand for our infection prevention and hygiene products and services has significantly increased as a result of the pandemic,” he says.
As a result, Minnesota-based Ecolab, where Schmechel has been based for 25 years has seen healthy sales for its core products to help combat the pandemic. The share price of the group, which has been growing exponentially in recent years, took a hit at the height of the pandemic’s first wave in March last year, but closing strongly by year end, giving a market value of more than $60bn by the start of 2021.
In a sense, he sees the pandemic not only as a global catalyst for changing consumer behaviour, but also an accelerator of transformation across businesses of every type.
“The pandemic clearly forced a transformation, especially at the intersection of process, organisation and technology- how work gets done, where the work gets done, and what systems support that work,” he says.
For Schmechel that evolution started when he was made chief transformation officer of Ecolab’s European business in 2008, just before the global financial crisis kicked off. “We had been aggressively moving down that path for the better part of 10 years when the pandemic hit.
“Our ability to quickly leverage and move more quickly on getting work on to the right desks and getting processes aligned, as well as a continual rollout of technology, was a huge help to our continued ability to be successful,” he says.
The group also benefited from systems that had been developed to gain an increasingly granular level of information “about how we’re thinking about a business and how we’re managing its performance.
“At a business unit level, increasingly and quickly we turned the page where we could look at it at the product level, meaning the consumption level of for example hand sanitisers – what is the demand for this product?
“This was critically important, not only because we needed to understand and get an advanced idea of where the business was going and what we should be looking for as evidence of a recovery, but also is vitally important in terms of maintaining continuity of products, as customer demand shot up,” says Schmechel.
Soon after the pandemic hit, Ecolab raised $750m in debt to ensure a buffer against any financial weakness created by the pandemic. “We wanted to make damn sure that liquidity was not going to be a problem.
“We wanted our investors to understand, and we wanted to understand that we would have the cash resources to make it through any outcome,” he adds.
Strong free cash flow performance soon resulted in a much higher than usual amount of cash on the balance sheet- so the extra financial firepower wasn’t called for.
Bedrock of a career
Schmechel says that his ability to confidently respond to the challenge thrown up by the pandemic resulted from having worked in several roles in his 25-year tenure at Ecolab.
Originally trained as a geologist, having studied the subject at Yale before joining oil company Amoco, Schmechel gravitated to industry giant Exxon to become a treasurer after deciding he was more interested in the financial aspects of the sector.
Although he enjoyed the challenges of working for Exxon, that he describes as at the time as “always being in the running for not just the strongest in term of credit strength, but also the largest company by market cap,” a future elsewhere beckoned.
Keen to join an organisation where there would be better chance of making his mark, “having a bigger impact on the outcome,” Schmechel started as a treasurer, before being made corporate controller at Ecolab.
Schmechel says at the time he joined it was a relatively small company with annual sales of $1.4bn- a tenth of current revenues. In its last full year results Ecoalb delivered operating income of $2bn, up three percent from the previous year on net sales that increased two percent over the same period to $14.9bn.
When he started at Ecolab the firm “didn’t articulate our role in the world, in the way we do today.” But the group’s ethos of reducing water and energy consumption has since seen it grow as the sustainability agenda has taken hold globally.
A definitive moment in Schmechel’s career came in the chief transformation officer role, when he was tasked with developing a new ERP platforming for the group’s European business.
The project proved challenging not least because it was being rolled out as the global financial crisis was unfolding, but he says he was well supported by the group’s Douglas Baker, who was succeeded as CEO by Christophe Beck on January 1.
From that role where he had “no experience in systems deployment or organisation of work” to SVP Services and Systems, leading the supply chain with no practical experience, he became CFO in 2012, “the first time at Ecolab that I had started a job that I felt fully capable of doing,” he says.
“I had done all of the components of the job at various times,” he says. Regarding the arrival of the pandemic, he adds: “I feel the experiences that I’ve had leading up to it, have prepared me about as well as could be expected, or hoped for, in order to take the challenges,” he adds.
Schmechel says that in March Ecolab moved to remote working, having established a plan to maintain customer support and protocols for the safety of its 45,000 staff, aided by technology that the group had spent recent years investing in.
“As a finance team we worked very hard with our business partners, at the customer group level, to make sure that we are helping them understand the shape of demand, the shape of recovery.
“We’re continuing to be prepared for the world as it turns around, as the market and our customers recognise that our value proposition is going to be more relevant to customers than ever.
“Whether it’s a hospital or a restaurant or a production line cleaner, healthier, safer environments and doing it in a way that minimises their water consumption and their impact on the environment, says Schmechel.
When it comes to developing scenario planning to interpret the complex environment ahead, Schmechel says: “It is evolved in pretty much along the directions you assume.”
He says that investors are strongly supportive of Ecolab’s business model which is expected to continue to deliver predictable results. “The great majority of our products and services are sold to customers under long term contracts. Once we win a customer, we lock it into a revenue stream which is sustainable, as long as we do a good job.
“We not only keep the customer, but we find new and growing ways to service them. And so the predictability of the business, is really part of the attraction for investors and partly what’s behind our very high P/E ratio,” he adds.
An example of the durability of the Ecolab model is given in the example of the restaurant sector where hygiene products that would have been deployed in kitchen areas are now being seen front of house.
“If you think of a business like a restaurant, the products that they would be ordering previously such as kitchen warewash machines, detergent and sanitiser are now being supplemented in the place customers are coming into,” he says.
“We’ve got way more granular in our tracking, actual and anticipated demand for products, so we can make sure we are being increasingly relevant to customers, and their operations during recovery.
“We are monitoring not only our terms but also our payments, understanding them and having real conversations around the value that we’re providing, how we can be more helpful, and making sure we get paid for the value that we provide,” says Schmechel.
When it comes to continued demand for hygiene products, he says: “I believe it will have legs for the long term.
“What will become common across big swathes of business is increasing focus on sanitation and creating environments that are healthy and safe for them to operate in,” he says.
He says that alongside the vaccine programme, economic recovery will result from a moment when people feel comfortable about their environment. “Think about hotels, airlines, restaurants, any kind of entertainment. When people at the individual level feel safe going into an environment and relaxing, and enjoying themselves, that’s what will drive recovery.
“The vaccine is a big part of it, but also a focus on clean and sanitary environments, I am convinced it will continue to be a big driver for our customers’ value propositions.
“I don’t think that’s going to back off for a long, long time. We’ve seen evidence of that in earlier, much less significant outbreaks of viral disease. When you go into a bank or a large commercial centre, you have hand sanitisers at every elevator.
“That was the direct result of earlier concerns, that were not nearly at the scale we’re seeing today. So the focus on clean and safe will continue to be a big driver,” he adds.