How Ecolab Aims to Clean Up in Hospitals

Ben Johnson: I'm Ben Johnson, equity analyst here at Morningstar, covering the chemicals and agrichemicals space. Today I'm joined by Susan Nestegard, executive vice-president of the Global Healthcare business with Ecolab. Thanks for joining me, Susan.

Susan Nestegard: Thanks, Ben.

Johnson: To start off, can you talk to us a little bit about the factors that make now an opportune time for Ecolab to focus on the health-care business?

Nestegard: Certainly we've been hearing a lot about health care in the news and in general the market is growing. Some of that growth is things that we have to control. There's basic growth in the aging population and in the demographics.

But the areas that we're focused on are all about infection prevention. Health care or hospital-acquired infections are not only the number four cause of death in the U.S., with 100,000 people dying each year, but they're a big cause of waste in the system. Essentially $30 billion to $50 billion is spent on these infections in the health-care environments.

Ecolab has been so successful in helping our customers address their food safety issues; it's a very logical transition to leaders in infection prevention.

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Johnson: OK. This is not a new market for Ecolab, but you're going to new corners of this market, let's say. Can you talk about some of the unique barriers to entry, barriers to success, and how you're setting up this business to take on those barriers and overcome them?

Nestegard: First of all, we're doing it very consciously. Near the end of 2007, we did our strategic plan, and the numbers and the trends, everything said health care we wanted to be our third circle.

So how are we going to win at this? What is different? It is a more regulated environment. Do we have the capabilities and strength to get there? We need more clinically proven outcomes. Are we ready to invest in that and be in it for the long haul? So we understand the barriers, and we've made the commitment to get there.

Johnson: Ecolab historically in the existing core businesses has tended to take this holistic view of how you work with your customers, the sort of circle-the-customer strategy. I think it helps to understand Ecolab from sort of a visual perspective.

If you could walk us through a visual, say maybe in an operating room for instance, as to how Ecolab finds its way into a health-care environment.

Nestegard: Right. Great. I think, as you said, Ecolab is different that way. We are very customer-solution focused. What are all the jobs our customer is doing and how can we help them, aligned with our core competencies, in getting that done.

So in the operating room, when they're changing over an O.R., they need to clean and disinfect the room, and create the sterile field, getting it ready for the next patient. In the past, we've provided disinfectants; we've actually provided turnover kits for the O.R.

But now our holistic approach is saying, how can we improve all the processes that they're doing, bring in ergonomic tools to make them more efficient. Because actually that time in the O.R. is so critical for them. It's where the all the money is in the hospital. So that's a critical outcome.

Then you look at the difficulty of setting up the operating theater. It's simple things like how are the drapes folded so they can easily slipped over the equipment. It's very customer-focused, and we'll be looking at every point of opportunity for how can we do a better job bringing that infection prevention solution into that arena.

Johnson: It seems like a no-brainer, right? I go into a hospital; I would expect that to be one of the cleanest places I could ever set foot in. Some of the data you've shared show that that's maybe not the case.

Why now? Why hasn't anybody said, "Hey, we need to do a better job of cleaning and sterilizing our hospitals?" What are some of the factors that have come to light that have increased that awareness?

Nestegard: I think over the last, truthfully, five to 10 years, there has been a slow-growing public awareness. But today I believe it's up to 27 states now require public reporting of infection rates. So consumers are looking online and seeing what hospitals and making their choices where they want to go.

In addition, the end of 2008, Medicare and Medicaid identified five health-care acquired infections that they're no longer going to reimburse. So when the money stops flowing, the attention goes on that. Then health-care reform, the awareness and the discussion and the debate.

It is an opportune time. The attention is there, and the hospitals are looking for a solution. Interestingly, they don't have a set of industrial and process engineers like a food and beverage processing plant does. Their head of QA has a different set of competencies. They're looking for a solution partner to work with them to get the outcomes and improvements they're looking for.

Johnson: What are you long-run profitability targets for this business? Is this something that's going to tend to fare better than the broader aggregate Ecolab portfolio, which has had historically great and very consistent returns on capital? Is it going to start maybe with subpar returns and then increase, if you could give us a sense around that.

Nestegard: Absolutely. Our expectations are high. When we put this in our strat plan at the top of 2007, we did it for the numbers. The alignment with our competencies, our expectation for margin growth. So the realization right now is we're in a significant investment mode. As I put together my financial plan for next year, next Tuesday I'm going to be reinforcing that commitment to the investment mode.

But we do see, within the next three to five years, a significant margin expansion for obviously the health-care sector, but for Ecolab along with it.

Johnson: Great. Thanks so much for joining us.

Nestegard: It's a pleasure. Thank you, Ben.