Ecolab profits down despite price hikes to cover rising freight, material costs

Pummeled by rising freight and material costs, Ecolab fought back with price hikes and surcharges. Still, net income dropped 10% in the first quarter.

As the St. Paul-based cleaning, water purification and filtration chemicals firm saw its industrial and institutional businesses rebound from pandemic disruptions, sales jumped 13% to $3.26 billion during the quarter.

Industrial profits, however, were badly impacted by raw material inflation and world events, causing a drag on the quarter.

"First-quarter earnings were consistent with our expectations, even though the operating environment was not," said CEO Christophe Beck during a call with analysts Tuesday.

When adjusted for one-time events, such as the acquisition of Purolite and the near shutdown of its 370-person chemicals wholesaling unit in Russia, earnings rose 1% to $236 million, or 82 cents per share.

Still, analysts were expecting a penny more. The quarterly revenue bump exceeded expectations.

Ecolab's stock fell 4% on Tuesday to close at $168.47.

Even so, Beck said he was "very pleased" with results.

Solid volume gains and a rush to "aggressively" increase prices helped overcome raw material and freight costs that were 25% higher than a year ago, in part because of disruptions created by Russia's war on Ukraine, he said.

Ecolab said it endured more than $1 billion in cost increases in 18 months, but its "strong pricing momentum, along with robust new business gains and benefits from innovation and digital automation and services, helped us to fully overcome these unprecedented headwinds," Beck said.

On April 1, Ecolab rolled out temporary fuel surcharges of 8 to 12% to offset rising global oil and raw material costs. Last year, Ecolab boosted prices by roughly 4% to counter rising costs from freight, raw material and vendor disruptions.

Beck said pricing hikes will continue, reaching the 6 to 7% range for the balance of the year.

While there is some uncertainty surrounding the timing of the new surcharges, Beck now expects adjusted earnings to reach $1.22 per share in the second quarter and to grow in the "low teens" for full year 2022.

During the quarter, Ecolab's industrial unit, its largest segment, saw double-digit sales growth, but profits plunged 10% to $189 million. Ecolab spokesman Mike Monahan said during an interview that raw material cost hikes hit the industrial segment hard.

In contrast, the institutional unit — which services hotels, restaurants and long-term care facilities — saw mild raw material cost hikes, allowing operating income to increase 79% to $110 million during the quarter.

The lodging industry's recovery from early COVID-related shutdowns and disruptions helped results, but an "unexpected" slow return of restaurant customers has dragged those sales by roughly 35%, Beck told analysts.

Ecolab's newly acquired Purolite business, with $400 million in annual sales, is expected to grow the firm's pharmaceutical business as demand already exceeds its supplies, Beck said. Ecolab is now building new Purolite plants in Pennsylvania and the United Kingdom.