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Rating Action:

Moody's changes Ecolab's outlook to positive

13 Dec 2019

New York, December 13, 2019 -- Moody's Investors Service ("Moody's") affirmed the ratings on Ecolab Inc.'s senior unsecured notes at Baa1 but changed the outlook on the ratings to positive from stable. The change in outlook reflects Ecolab's strong track record of growing and improving the portfolio through M&A activity and organic growth, while maintaining a strong balance sheet with only occasional deviations from the company's net leverage targets. The positive outlook also reflects good scale, strong and consistent free cash flow and relatively strong and stable EBITDA margins, which should expand modestly after the pending separation of the upstream energy business. The commercial paper rating is affirmed at Prime-2.

"Ecolab enjoys entrenched competitive positions as a global supplier of water treatment and process and cleaning chemicals for industrial and institutional customers," according to Joseph Princiotta, SVP at Moody's. "We expect the separation of the lower margin upstream energy business will strengthen margins and improve margin stability in Ecolab's remaining portfolio." Princiotta added.

Affirmations:

..Issuer: Ecolab Inc.

.... Commercial Paper, Affirmed P-2

....Senior Unsecured Shelf, Affirmed (P)Baa1

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Ecolab Lux 1 S.A R.L.

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Ecolab LUX 2 S.A R.L.

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Ecolab NL 10 B.V.

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: ECOLAB NL 11 B.V.

....Senior Unsecured Commercial Paper, Affirmed P-2

Outlook Actions:

..Issuer: Ecolab Inc.

....Outlook, Changed To Positive From Stable

RATINGS RATIONALE

Ecolab's strong credit profile is supported by its leading market positions in the commercial cleaning and sanitation market, strong competitive positions in water treatment and process chemicals for industrial and institutional applications. Key business sectors, such as water treatment, institutional services and food and beverage enjoy significant barriers to entry; including on-site technical service requirements, patents and long-term customer relationships. Ecolab enjoys geographic, customer and end-market diversity, good long-term growth prospects, high profit margins, relatively steady EBITDA and strong free cash flow generation.

The strong credit profile is tempered by event risk associated with the company's ongoing M&A activity that occasionally stresses the balance sheet. In addition, with close to half of revenues outside the US, Ecolab faces foreign currency exposure. Competitive activity and portfolio churn are also modest negatives in the credit profile, mitigated by Ecolab's strong competitive position and barrier-to-entry attributes mentioned above.

Earlier this year Ecolab announced its intent to spin off its Upstream Energy business, which is comprised of Oil Field Chemicals and WellChem and provides oilfield specialty chemicals and services solutions globally. The business generated roughly $2.4 billion of revenue, $170 million of operating income, and $340 million of EBITDA in 2018. The transaction is expected to be completed by mid-year 2020; subject to board approval, filings with the SEC and other customary conditions. Post separation, Ecolab's remaining energy business will be Downstream Energy, which is less cyclical with mid-single-digit percentage growth potential but will represent only about 7% of sales (down from 23% for total energy).

EBITDA margins have been reasonably steady over the past several years, hovering around 22%, despite periods of lower oil prices that weakened energy markets and the effects of foreign exchange and raw material headwinds. We expect the separation of the Upstream Energy business will strengthen margins and improve margin stability in Ecolab's remaining portfolio. Adjusted leverage as of September 30, 2019 was close to 2.4x (or 2.6x pro forma for the separation of upstream energy). We expect continued organic and inorganic growth in revenues and EBITDA will help sustain or improve metrics and offset the impact on leverage from the separation of Upstream Energy and future M&A activity. Management has stated proceeds from the spin will be used for share repurchases and/or debt reduction.

The ratings anticipate continued M&A activity focusing on adjacencies and bolt-on acquisitions to supplement organic growth. However, large debt-financed acquisitions cannot be ruled out if market valuations of target companies improve. Following the transformational acquisitions of Nalco for $8.3 billion in 2011 and Champion for $2.3 billion in 2013, the latter increasing net leverage close to 3.0x, Ecolab has since balanced M&A activity, debt management and balance sheet targets with shareholder remuneration. Over the last five years net M&A activity has averaged about $450 million per year. In February 2017, Ecolab purchased Laboratoires Anios for roughly $800 million, briefly raising leverage which subsequently improved with debt reduction and EBITDA growth.

Ecolab's Prime-2 rating is supported by an excellent liquidity profile and significant cash flow from operations, cash balances ($136 million as of September 30, 2019), and a $2.0 billion revolving credit facility due in November 2022. The revolver supports the company's $2.0 billion US and European commercial paper program, which had $384.4 million outstanding under its Euro program and $75 million outstanding under its US program as of 30 September 2019. We expect Ecolab to generate close to $1 billion in free cash flow in 2019 (which we define as operating cash flow less capex and dividends). Ecolab has $300 million of notes maturing in 2020, and $1,020 million in 2021.

The positive outlook reflects our expectation that management will continue to target 2.0x net leverage (before Moody's adjustments) and adhere to a balanced approach to share repurchases, acquisitions, and debt management so as to protect credit metrics. The positive outlook also anticipates continued organic and inorganic growth in EBITDA over the next 12 months to offset any stress in metrics resulting from the loss of EBITDA from the spin of upstream energy.

The ratings could be upgraded if Ecolab continues to target net unadjusted leverage at 2.0x (roughly 2.4x on a Moody's adjusted basis) while retained cash flow to debt is sustained above 25%; achieving these metrics might require management to use a portion of any separation proceeds to reduce debt. The ratings could be downgraded if Ecolab were to change its financial philosophy to target higher unadjusted net leverage, i.e, closer to 2.5x, or if large acquisitions stress the balance sheet with adequate recovery extending beyond a two year horizon.

Environmental, social and governance factors in general, and environmental risks specifically, are not likely to be material considerations in the rating process. Ecolab buys, reformulates, processes and sells large quantities of commodity and specialty chemicals, which Moody's accesses as Emerging - Elevated risk, and has 28 sites in the US subject to waste disposal site cleanup activities imposed by CERCLA. However, Ecolab's environmental profile is more favorable than most in the industry as its programs and services target food safety, water treatment, cleaner industrial water, sanitized spaces and energy conservation to the food, healthcare, industrial, energy and hospitality markets. Governance is strong and reasonably transparent with an independent board and clear and consistent financial policies including targeted net leverage (unadjusted) of 2.0 times.

Ecolab Inc. (Ecolab), headquartered in St. Paul, Minnesota, is a leader in institutional, water, hygiene and energy technologies and services that provide and protect clean water, safe food, abundant energy and healthy environments. Revenues are geographically diverse with about 58% of revenues in the US, 24% in EMEA, 12% in Asia, and 6% in LA. Ecolab delivers programs and services to the food, energy, healthcare, industrial and hospitality markets in more than 170 countries. Ecolab had revenues of $14.8 billion for the twelve months ended September 30, 2019.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Joseph Princiotta
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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