Ecolab's most profitable business is suffering the most from the pandemic

As the coronavirus spread around the country this spring, hospitals ordered record amounts of cleaning products from Ecolab Inc. but restaurants and other businesses bought considerably less — and they outnumbered the hospitals.

As a result, Ecolab's sales fell by 15% and its adjusted profit was cut by more than half.

Executives said Tuesday they think the worst is over, though, and demand for cleaning products will rise as people around the world demand greater cleanliness in the wake of the pandemic.

"Hygiene standards will increase in every market we serve," Doug Baker, the company's chief executive, told analysts and investors on a conference call.

"New opportunities are presenting themselves everyday in large-space disinfecting, hand care, water safety, clean rooms and data centers."

Shares in the St. Paul-based company this year have outperformed the broader S&P 500 and Dow Jones industrials indexes, though trailed the tech-heavy Nasdaq.

After losing one-third of their value by mid-March, Ecolab's shares soared upward and were 10% higher on Monday than at the start of the year.

But they fell nearly 9% Tuesday as investors digested the plunge of Ecolab's sales to institutional customers, which includes restaurants, hotels and some other businesses closed by the effort to slow the virus.

The business segment provides one-fourth of Ecolab's sales and half its profit. Baker told investors not to expect it to recover until next year.

"Institutional was where the COVID impact was most acutely felt. ... The rest of the businesses collectively did quite well," Baker said.

Sales in the institutional segment fell 35%, driven mostly by the declines at restaurants, hotels and airlines. Ecolab's transaction volume to institutional customers was down 80% in April and fell at lower levels in May and June.

The effect of the demand drop-off was exacerbated by a backlog of supplies with distributors, executives said. Ecolab offered $37 million in discounts and write-offs to customers in the segment. In return, it sought new, long-term contracts with some of them.

"There still exists significant fear of catching COVID-19," Baker said. "Until that fear dissipates, I don't think you're going to see huge change, or growth, in the institutional business."

Ecolab's sales to hospitals and other health-related customers rose 22%, hitting a record, though the segment is less than half the size of the institutional business line. Sales to industrial firms were down 2%. Ecolab completed the spinoff of its upstream energy business during the period.

Including costs related to the spinoff, Ecolab reported a loss of $2 billion for the quarter. Adjusted for ongoing operations, the company's profit amounted to $129 million, down 62% from the same period a year ago. Sales were $2.69 billion.

As at many multinational companies, Baker said Ecolab has been watching the performance of its operations in China, where the virus originated and people first adjusted to it, for signs of what the future holds in the U.S. and elsewhere.

Ecolab's sales in China recovered throughout the spring and the company saw its sales start to grow again there in June. Even so, the fear of the virus remains pervasive in that country. "China has this under control in all the reported respects and they still don't have the same level of activity in retail, dining or travel," Baker said.

For the U.S., Baker said, "The government has to do smart policies, but we need a vaccine. Until communities feel confident they can start gathering again, you're not going to see a renormalization of the economy."

Evan Ramstad • 612-673-4241