Q1 2020 Earnings Call
Greetings and welcome to equal out first quarter 2020 earnings release conference call.
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Brief question answer session will follow the formal presentation.
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It's now my pleasure to introduce your host like wanting it. Thank you Mr. money when you may now because.
Thank you Hello, everyone and welcome to Ecolabs first quarter Conference call with me today, as Doug Baker, Ecolabs, Chairman and CEO Christophe back, our Chief operating officer, and Dan Schmechel, Our Chief Financial Officer I.
A discussion of our results along with our earnings release in the slides referencing the quarter's results in our outlook are available on Ecolabs website, Ecolab Dot com slash investor. Please take a moment to read the cautionary statements and these materials thing that this teleconference and the associated supplemental materials include estimates of future performance. These are forward looking statements and actual results.
Could differ materially from those projected.
Factors that could cause actual results to differ described under risk factor section in her most recent form 10-K, and then are opposed to materials. We also refer you to the supplemental diluted earnings per share information in the release.
Starting with an overview of the results adjusted earnings per share grew 10%, reaching the upper end of our forecast range results reflected good underlying sales growth pricing and cost controls, which yielded the first quarter's earnings increase cobot 19 netted to a modestly negative impact on sales by the minor benefit to earnings from call.
It's controls.
Acquisition adjusted fixed currency sales increased 2%.
Institution on health care in life Sciences segment showed good sales growth, which more than offset a 3% decline in upstream energy, excluding the upstream energy segment Ecolabs acquisition adjusted fixed currency sales increased 3%.
Adjusted fixed currency operating income rose, 12% with <unk>.
Operating margins expanded 110 basis points pricing improved volume growth and cost savings initiatives more than offset investments in the business and other selling related expenses during the quarter.
Progress continues on the separation of our champion ECS business. We continue to expect the transaction to be completed by the end of the second quarter.
Ecolabs, leading capabilities in food safety, kleen water and healthy environments have positioned us well as an effective partner in this world crisis, and we've responded aggressively to the pandemic that's more fully outlined in our March 25th Cobot 19 webcast. We have taken a broad range of actions to protect our people and further bolstered.
Our already strong financial position the cash flows.
At the same time, we're working aggressively to safely assist our customers providing them important product service and consulting support they need to keep their operations safe and functional for the president and have them well prepared for when they reopen.
Were also preparing growth plans to aggressively drive new business gains as a recovery develops.
As previously communicated the uncertain outlook regarding the full extent of the Pandemics impact on the global economy and its longevity do not provide an adequate basis for us to provide either quarterly or annual earnings forecasts. As a result are forward looking guidance remain suspended.
2020 represents an anomalous period of unprecedented proportions as the world navigates the challenges from Cobot 19, our food safety water management and infection protection positioning had become even more relevant.
Our long term growth opportunity remains robust driven by our leading market positions our focus on providing our strong customer base with improved results, while lowering their water energy and other operating costs and our huge remaining market opportunity.
Further our financial position is strong with ample liquidity in a resilient free cash flow.
We believe looking beyond the near term uncertainty and focusing on D. sustainable long term business drivers will yield superior long term performance for ecolab and for our investors and now here is Doug Baker with some comments.
Thanks, Mike and good day to everybody.
I just have offers some comments on Q1 in a bit of perspective on 2020.
So Q1, adjusted EPS results were better than expected.
As we realize expected business acceleration versus Q4, but covert 19 impacts were different than we anticipated.
Over 19 did negatively impact sales, but also drove war expense in p. any benefits and other costs, which more than offset the sales impact, but this is not a pattern. We see going forward. We know the common cold that 19 period will be more adverse.
But importantly, we entered this period in a position of strength.
This is in company earn very good shape, we've got a great very experienced team that's been through crises before we've got a resilient business model that generates cash regularly and we have a strong balance sheet and cash reserves. So this is important as we expect the corporate 19 period to extend into 22.
Anyone and we believe the recovery will be shaped more like are you then a v. Finally, we also believe the cold good we'll have a significant impact on our business short term quite negative but longer term quite positive. So we're guiding principle is really manager short term and away the position.
That's for maximum long term benefit that's where the values. So we've already taken a number steps to do this we created a cash reserve backstop, we cut expenses, we put in hiring freezes eliminated merit increases et cetera, We've also cut capital by 50% versus our budget, but.
Reserve digital antimicrobial in hygiene tech investments as they work.
Now these are detailed examples of steps, we've taken and how our approach of managing the year to maximize our post coal that potential shows up but let me offer some perspective on the year in the future.
First 2020.
Like it seems everything is with told that the outcomes are gonna be asymmetrical.
We have businesses, having record years or that we expect to have record years like FNB food retail healthcare and life Sciences.
Well, we also have businesses competing in markets that have been virtually shut down like institutional with restaurants hotels cruise lines et cetera, really not in business in a material way.
So in total the net impact of the pluses and minuses. The these groups of businesses.
We'll be negative for the year on both top and bottom line and we signaled that previously.
The timing impact over the course as the year, though is gonna be imbalance too.
Q2, we believe is gonna be the most impacted corridor as we realize both before affects of covert 19 volume decline driven by these temporary closures in key markets plus we're also going to be realizing channel de stocking in the same time.
However, we expect Q3 in Q4 to start showing sequential recovery from Q2.
This recovery during the second half will be driven certainly in part by Reopenings, but also by expected increased demand for hygiene programs now we're already seeing this across industries like FNB food retail and even in traditional industrial settings, where we hadn't had this type of demand before.
The recovery will be further driven by a number of our own initiatives that we already have underway.
We're feeding in fueling segments with momentum FNB, FRS healthcare and life Sciences, we're adding people investing in capital doing all the things we need to do to build on that momentum, we're launching new offerings, particularly in hand, Kieran sanitizer categories, and we're developing new applications for a powerful bio qual system.
Three were maintaining growth investments in animal health and data centers, which we had seen as great growth opportunities before cold good and they remain great growth opportunities and finally, we're actively pursuing new strategic customers. This is a great time to continue to talk about the benefits we bring.
Good and difficult times.
Now all of this represents what we call the early stage development for the world after coal that.
Our business will certainly be pressured this year, but we'll continue to generate positive cash flow and gain share throughout the year.
We believe our clear leadership in hygiene anti microbial digital lowest use caused delivery environmental offerings will be even more valued after the pandemic has passed.
And a number of important factors. We believe will remain true we will still chasing huge market. We will still have a sizable competitive advantage one might argue that our competitive advantage will be improved we're in better shape than most of our competitors to handle it situations. Like this we will have great customer relationship as we demonstrate.
Were the right partner, particularly when the going gets tough we will have answers for water scarcity, which will still be a huge issue and finally, our he asked you advantages will remain significant unimportant.
Well, we also believe that there's going to be new transformational opportunities its customers and commuter these expectations evolve and this is where we will put extraordinary time and effort as we move through this year, we see building, an even broader and more robust set of annuity businesses as a highest priority for the year.
This is what we've got to use this time to do it's why we sold firmly believe that managing through the short term in a way the positions us for maximum a long term benefit is the right play so with that I'll hand, it back to Mike.
Thanks, Doug that concludes our from remarks operator, please begin the question and answer period.
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One moment, please let me pull for questions.
Thank you first question is from the line of Tim Mulrooney with William Blair.
Good afternoon, Doug if I could just build on that last comment you are making if I could ask you to break out your crystal ball for a second.
How are you thinking about what the world looks like a year from now when all the governments and corporations have retooled their cleaning and sanitation programs and protocols Where's the pop going and how are you positioning the company to best take advantage of this likely increase in your value proposition.
[laughter].
Well you know I mean, I guess early read is.
Twofold, I mean, I think we're quite confident that there's going to be a heightened awareness insensitivity towards hygiene concerns by consumers, which ultimately is what's going to drive businesses to raise your standards.
And so I think we'll see this in a variety of ways. If you went back to some of the earlier almost pandemics.
They caused many commercial buildings for the first time to put things like hand, sanitizer and their lobbies I could say that was a baby step to what we feel might be the potential here I.
I think consumers are going to be quite aware of surroundings, you're going to be quite sensitive to our things actually clean they're gonna one visible signs call. It cleanliness theater, how does this show Wap how does it manifests itself it cetera, and this is going to be quite important to consumers.
And as a consequence to our customers. So that obviously, one big area. The other as we've all had this very different experience now with digital.
On the interesting part is solve our customers' and so while we've had big digital advantage and I imagine we ask questions about as it has proven to be invaluable. During this time because it allows us to provide service levels awareness levels maintenance ongoing.
Oh vigilance that you couldn't do if you were connected in the way we were in some customers who I think we're reluctant to the party in some industries. So even in the food and beverage industries have become real big converts.
I think this is going to be true broadly that the push we haven't digital is going to prove right and that we really do want to accelerate connectivity with our customers. We went to conduct our supply chain in certain ways to customers. We want to make sure. Our field is adequately connected to Washington to customers and so a lot of this.
Area I think is only going to become more important I think we're all somewhat maybe I'm surprised at how effective we are able to work remotely, but we're still only touching I think the tip of the iceberg, there and as we get this connection I think our value our know how value our unique information stream valley.
You are potential AI value all gets heightened even further because we've got a great amplifier for and then there's a lot that we don't understand yet that's going to I think reveal itself over the coming months and that's exactly how we're approaching this we have confidence in a few things and we are.
Watching and learning aggressively in other areas because I think this will reshape society I thinking mostly positive ways. It's a very terrible thing to go through but how it comes it manifests itself can be very important and in a couple of areas. We're quite confident can be quite positive for us.
Okay. Thank you.
My second question is on raw materials.
So years ago, Doug and I mean, this was years ago, I think I remember you, saying that if oil ever broke 20 box you'd hedge it out as long as you could.
I mean that that was a different time and things are moving fast here.
But what is your long term view on the price of oil and might the company get more aggressive with hedging right now and are there issues with finding counterparties in this environment. Thank you.
So well I have a great benefit of a lousy memory. So I have plausible deniability about everything out hedge oil forgot below 20, which doesn't mean it didn't happen just means I have no recollection. So.
Here's what I would say, we don't take hedge positions like that for the simple reason nobody buys our stock because if they they think we'd be any good of tests and well hedged transactions, which are known and specific in discrete with discrete timing, but that's really the extent of it and.
If we start straying there would you just kick us because that's not what we're about or about is creating great programs meeting customer needs and creating value that way in terms of crystal ball I mean, I. You know you obviously had on have one when it comes to oil and some of the other stuff I would just say.
You know this too I don't believe this is the into cycles in the oil business.
That's all very hard call you can see how sensitive is in terms of there's no inventory space for the stop which is why it moves so radically when supply and demand moves normally supply and demand moves by like a point or two during recessionary period here we've had.
Oil fall in demand by 70% in April I mean, it unparalleled. So you know I think we're going to go watch incent understand it but we are going to take hedge positions, because we know will likely get it wrong overtime.
Thank you.
Our next question is funnily enough Manaf <unk> with Barclays. Please proceed with questions.
Thank you good afternoon, Doug you gave some color on the key incomes in the second instead of being up in those.
I was hoping if you could maybe give some color on what the exit rates look like.
That's fine.
Just to get some gauge what what that looks like.
Yeah, I mean, I would say what we've seen in April was very similar to what we expected to see now you're here disadvantages you didn't know what we expected, but it's along the lines that we just talked about.
The businesses that look like we're going to be advantaged because of the shift from restaurants to food retail you would expect our food retail business to have increased sales as the grocery stores are working very hard to increase hygiene standards.
To protect their workers and their consumers even in environments, where it's a pickup situation and so weve certainly seen that play out in increased demand for that business. The shift also causes big changes in shifts within the food and beverage industry itself as they've got a change pack sizes to more consumer.
Oriented from food service oriented pack sizes et cetera, and those shifts have also driven demand as has heightened hygiene for their workers to make sure that they can continue to create a safe environment for workers and continue to operate so I'd say in the health care is obvious in those demand.
Andrew obviously around anti Microbials in particular in hand care and the like stuff that you would expect that's offset somewhat by the fact that in the U.S. in particular elective surgeries have been frozen. So we've got part of our healthcare business with huge upswing in demand in part with significant.
Alan swing with that said the net in health care is a net positive as we go through and then life Sciences. So life Sciences was doing well pre call that continues to do quite well and then bio qual an acquisition, we made a little over a year ago, which has hydrogen peroxide tech.
Knowledge, either basically missed it enables us to do a number of things.
That we couldn't do before and that are quite important right now to customers. So they're getting the experience at the technology because of unique needs, but we believe that experience is going to alert leave well. We're watching it is going to lead to permanent use of this technology as we go forward and then on the downside.
Our restaurants are in hotel occupancy and the like cruise lines are all docked they're not consuming much right. Now. So you know 30% of our business is going to be under real significant pressure, particularly in the second quarter, where you have most of these restaurants down there will be.
Some opening as we move through the summer I don't think all of them in one rush, but we know the second quarter is the most acute quarter, because you compound that with distributors, having to reduce inventories as result of their demand being down et cetera, it's kind of the double the double whack, if you will and with this when you have reduced demand like.
Suddenly you get significant right fall through to profit because you know in this case were like at a 50 50, if you will fixed variable because you can't move quickly now find some of the variable cost. So the second quarter is going to be the quarter because most of.
The bad news, if you as a consequence of coal that.
Got it and maybe just as a quick follow up to that in terms of the most impacted access to the negative that you would like to just just some thoughts on what youre getting from Dan kind of what the main Street you Angeles's Wall Street today see feeling pretty optimistic the opening up just curious.
If you had any comments there.
Yeah, I guess, you know, we're watching what's going on around the world.
Yeah on so you know work in the United States, you're going to have very different I.
I think patterns simply because.
The governors seemed to have much more the steering wheel here and they're not going to act in one fashion and probably appropriately they've got very different situations by state you got very different density in some states and others and so I think you're going to see different reopening patterns emerge.
As you walk through here, we've seen what Atlanta is doing they're moving or early they're getting criticized for not Guy you know I think moving a day latest smarter than moving a day early honestly in this situation, but they're doing what they're doing yen. So it's not completely predictable in the U.S., but I would guess.
That you're going to start seeing some areas reopening in allowing restaurants to reopen and then what I think you're going to see governance consumer behavior. So if you're going to China, and China has reopened restaurants and restaurant volume has picked up from the low, but it's nowhere near where it was because until we have.
I think security that we know how to treat the disease step one and then ultimately we have a vaccine for the disease I don't think you're going to see fear abate to a point where people revert completely back to pre culvert norms and wasn't a similar 911.
So if you went through 911, which was a fear event.
Travel got stop for a period of time, we opened up within months, but it took two years for air line boardings equal pre 911, why because it took a while for people there to feel comfortable that probably the government had this under control going forward I think this will be more by now.
In terms of Theres, a vaccine people's comfort level will move up and I think you'll see a reversion back to mean fairly short order is my estimation, but until then I think it's going to be a slow ramp up as people reopened consumers become somewhat comfortable if they can do the safely and that's what's going to take time.
Yes.
Thank you.
Our next question isn't a line of Gary Bisbee with Bank of America. Please proceed with your question.
Hey, Doug how do you see your role.
Number of outsource services firms, calling out the big opportunity to help.
Disinfection passed and other things to get whether its restaurant or an office building.
Thank you pass business could benefit maybe there's some onetime sales of chemicals or more than they normally buy.
Real opportunity at some point over the next few quarters or or or in the Grand scheme. What you do do not see that is.
The big potential.
Well I think certainly we we are well aware of the reopening I'd say challenges and opportunities that all of our customers face they've got a startup. These operations again, they've got to do it in a manner that somewhat different from the way they were operating before because of consumer.
Expectation in real health concerns and so we are obviously doing a lot of work in this area to make sure that we can provide the help our customers expect from us.
Yeah, I mean, certainly whenever you have.
Sort of the reverse case, I, making here, which is when you going down like this down into Mansell suddenly because it's really brought on artificially. It's a consequence of municipal shutdowns. You also have not only the lost demand, but the walked inventory.
And when they start back up there is obviously going to have to be inventory pick back up there's going to be kind of heavy clean work early before they get to more normal patterns. So there will be somewhat of the reverse as you go through this process, but I don't believe this is going to be one day that this occurs across the United States.
Or across Europe, it's going to be a series of Reopenings that I think our across a number of months. So I don't know that it's going to be a seminal event.
Okay and then the follow up just how are you thinking right now about the benefit from lower raw material prices, obviously oil has gone way down or are you.
Given the challenges what are your customers in or is there any thought process and sharing some of that are being accommodative on pricing for some period of time or or are you likely to be able to flow much of that benefit through to your gross margins as you've done in past periods of lower oil price.
Yes, no I mean, our expectation is raw materials will be you know are going to be less this year than we had forecast going into the year for sure.
And as one of the comp one of the reasons is oil price per your example.
No I would say that's.
We are bearing a lot of costs beyond raw materials, I mean, one just reduce the volume in a plant environment never bodes well for gross margin.
You've got to fixed asset or you got some variable costs and.
In our manufacturing, there's also not insignificant fixed costs.
And we've had to have a lot of special transportation needs because of this huge uptick in demand and sanitizes and the other things and what we're doing is what's right for the customer as we go through this so I don't expect this to turn into a big pricing event, I mean fundamentally the ways our customers.
Her realizing reduced spend is we're not buying anything because her shut down.
In many cases.
And lowering their price when they're not buying anything does it really add to the add to their pleasure just adds to our long term paying so that's that's not really where it's been going and I think for good reason, but what we are trying to do is make sure. We understand we've been partners. Some of these companies for decades.
And they're going through.
Unbelievable trial right now think about the large hotel company small hotel companies large restaurant group small restaurant groups and so we are actively working to do and take our role seriously as long term partners, who benefiting the good times and understand how we can help in.
Difficult times around fixed fee arrangements around some of the other stuff how do we postponed and lengthen agreements and do things that may accentuate. The short term pain, but we think is exactly the right thing to do when you expect to be partners going forward for decades as well so we're taking those steps.
Which is a little bit why some of the Q2 conversation.
But.
I believe we are positioned smartly and intelligently to manage through this in a way that will maximize long term game for this company and that's exactly what our mindset is.
Thank you.
Our next questions from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Hi, there.
Great.
David Thanks for taking my question so first off.
Good.
Hey, discussing some improvement in China in March.
In institutional customer activity.
True lodging.
Given the improving I'm curious if you've seen that trend continues so far in April.
Yeah, you know I would say our China.
China recoveries going to be up and down and I think we said in March is going to be like a negative nine it was actually better than that so we saw continued recovery from our business in China, both on the industrial and on the institutional side of the business what we.
See an institutional as I alluded to in a previous answer was it's it's slow it's moving if you looked at the low point for lodging occupancy was certainly below 20.
It's now around 35%, so it's moving up but not at a rapid pace, let's just say it fell faster than it's moving up hence my opening comments that we expect more of our you recovery than a v. and I think theres a lot of reasons for that beyond just what we're seeing.
In China on the foodservice side, you're seeing improvement, but again, it's not a snap back in part is that China is still while they say there's no more colvin instances, there being very cautious in terms of allowing complete freedom of the population because I.
I think they're very wary of a double infection and so this is the pattern that we're seeing which colors. The answers I gave or informs the answers I gave earlier, so yes, China recovery still moving in the right direction.
Sales are recovering in China, a little faster than we said in our March 25 call.
But more of the pattern to same than different.
Great Thanks and.
Can.
You talked about the digital investments being directed in hand pair and bio well.
Have you think about how to.
Prioritizing does it.
Additional customers needs during the near term or are you focusing.
More on kind of long term solution you anticipate your customers might need in other words.
Have you gotten a sense of how urgently and to what extent your customers are looking to adapt to it I posed Kobe 19 environment do you think it.
They're looking to just do simple solutions like add more hand sanitizer dispensers.
Double down on purchases of disinfectant or do you think that.
Urgency as early as.
Yes.
Yes, you invest in more advanced solutions.
Maybe something more like what you're buying well.
<unk>.
Yeah, So Kevin I would.
I'd say.
Well, it's a combination of both to be honest. So you look we're doing some work and I mean have christophe fill that send because he is leading the charge on the digital investment.
There are nearing opportunities, but we believe there long term needs around digital training for instance, and how we utilize that capability to enable large customers to open quicker and more effectively but also have a technology that will provide leg.
In terms of their ability to use it on along in an ongoing basis other areas. Its feel connectivity in the light, but let me ask Chris talked to speak to some of those.
Thank you, Doug and I guess rain. So thanks for the question.
What's good was digital is that we remain very consistent.
You know it focusing our investments over the past few years and it's just going to get accelerate did now but the direction. So doesn't change just there as a reminder, so I was three big pillar is.
In digital these first the to enhance the guesstimate value.
I think about it like a headcount compliance.
In a hospital, making sure that Dole has kept person that is really so maximizing so the protective measures that they can have with and kept product second is really so to maximize that with fees. The impact which is really saw facilitating to work of our teams and 30 to improve.
Oh operation performance those are the three big strategic pillars that we declared many years ago on that people really remain focused on and when we think in terms of alignment between customers truly needs today, well think about so a remote monitoring as you've heard us well.
The fact that in many places we don't even go in even if they're operating.
While the fact that we had the system I shouldn't center, we can provide service and value even if we know dare physically.
Second one is out to making as well so a guesstimate processes well that helps them reduce day costs, while we know there as well, but it can be as well so predictive analytics that we doing so for legionnaires disease for instance in here with us reducing the risks as wed for customers that truly new.
I'd now and lot, but at least so compliance as mentioned so for instance to hand care compliance program for hospitals that I mentioned earlier well in discovery to environment. This is even more.
But so far away customers and to take again, so what Doug said, if you may need to go well the hygiene standards are going to go up.
In the next few quarters few years, we believe a how much we can debate that obviously well digital technology is going to help us help our customers even more so that would be my take.
Thank you.
Our next question from the line of John Roberts with CBS. Please proceed with your question.
Thank you and glad you also on wells.
Doug some countries Sweden's South Korea, Taiwan at kept full service restaurants open you have any evidence yet of increased product use per location in any of those areas were full services state.
Oh no.
No they're relatively small what I would say is.
We have a number of QSR restaurants opened we have restaurants opened another markets.
Where we've seen certainly heightened sanitizer sales.
Hand care sales in particular, and so that in many cases, even offset lower traffic.
Okay, and then propylene surfactants and other chemicals are coming down do you think you'll get some help in the second quarter from lower raws or will you be buying so much less that it's going to take longer before you see the benefit of some of these lower Ross.
Yes, no I mean, the lower our cost we would expect to have a benefit in Q2, but it's just going to be because of volume described destruction and the.
Institutional business in particular, which is short term, but acutely focused in Q2 is going to I mean, you know what that does the plan overhead absorption in the rest that's going to be much more of the story.
Okay. Thank you.
Our next question is from the line of Chris Parkinson with Credit Suisse. Please proceed with your question.
Great. Thank you very much in terms of your a supplemental commentary regarding healthcare and life Sciences trends.
Our your customers solely in reactionary most still are there already discussions on how to further develop their programs over the long term. So basically where do you believe you will offer the most impact in terms of your health care Bioflo pop firms.
And on the former How'd you rank yourselves.
In terms of the competitive environment. Thank you very much.
Yeah I just saw her quick perspective, then ask Christophe to comment.
From a competitive environment you I think in these.
Periods.
I think you got to you got to certainly watch your traditional competitors I would say there.
If anything this typically accentuates our strength.
Our balance sheet.
Financial model kind of long term management.
And scale.
But you got also make sure you're watching for new entrants in maybe people enter in ways that they the previously didn't make much sense, but this opens the door. That's also true for us by the way entering I would say some new businesses.
Then finally.
I think I'd ask Chris talked even abroad. It I think there's a number of customers are different places per your comments healthcare I think it's interesting question and then maybe comment in some of the other.
Businesses, even those who are going through the toughest times are certainly thinking ahead already and haven't conversations Christophe.
Thank you Doug.
Hi, Chris maybe up to your comment on a reaction or reverses a proactive.
Especially so in hospitals.
It's clearly study does a reaction or remote.
Because they got overwhelmed with so many patients so who came in.
Into hospitals, and we've had them.
As well, we saw sunny dicing programs that they've been growing very fast, it's also helping them as well disinfecting as wed they P.P.E. then masks.
Well you know hospital that was really so making sure that they could serve the most urgent needs that they have in hospitals as we've seen in media abuse. The over the past few weeks or months no. It's shifting so towards more proactive and interestingly enough well, it's coming back to the value that we've been Oh.
Offering so for a long time I just as a reminder, what we do for hospitals each to help them. So we then hospital acquired infections, which is obviously very aligned with what's happening in here. So the needs for those hospitals. So he is growing and once these tidal wave is a little bit so.
Softening Saddam we see release a hospital so come back to us and when Youre asking how can we help Dan really reduce soda that day infection rates, so going forward and if we move a little bit. So a further away so from hospitals and think about so no hotels and restaurants, well, it's been a bit different obviously because.
I had the wave down.
We had them really so stay open as long as they could by providing them. So in some detail programs as well worked out quite well then closed and then it's really so helping them down.
Thinking about how to reopen.
What are the programs.
They need what are the products that they would require we have done a lot of whether he knows as well, but we had thousands of people those by joining to understand so the bed ground as well of Gavi to how can it be dealt with how can we live with it as well so going forward and then it's really so training that people as well.
Taking that time as well just kind of downtime as well in between train I would people's serving their people training them as well and last but not least Chris.
It's also to provide our audit services, which is ultimately making sure that everything that Weve plan together to give today has been surety delivered and really so closing the loop as such so.
Kind of very aligned with the value that we've been offering so far.
Thank you and just.
In Europe first quarter of pest elimination results, you mentioned difficulties and accessing customer service.
I imagine is still ongoing.
But do you ultimately bleep tests I will merge into one of the other kind of mega trends that you're seeing across water hygiene disinfectants et cetera, just given the disease of one's component.
Just wanted to.
Or what you're getting from your customers and how you see the global opportunities emerging versus the.
Versus let's say 19 in prior years. Thank you.
Yeah, I'll I'll quick answer so the Pes business, Yeah, I mean, the access reference was fundamentally some of the buildings are disclosed.
And so that's that's created some access challenges.
They're short term that that will abate.
But we do not see any circumstance, where pest services and our pest programs in particular are going to be less valued going forward. We think we think the opposite case is probably the better argument.
Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thank you and good afternoon, everyone. Yeah, maybe you could just talk a little bit about where you saw the very strong results in the first quarter.
Give a sense of you know, we obviously lots of stories a across the universe of products being hoarded and so forth was there anything maybe be on hand, sanitizer chugai selling to customers that you think might have been have been built up substantially.
Yeah, well I'd say a couple of things.
The quarter.
We were going to have a great quarter before coal that we ended up having good earnings we talk that sales were modestly negatively impacted from coal that those who are realizing the recovery in institutional that we had.
Predicted and then the other businesses are having a good quarter, where we certainly saw heightened demand even though we said there is some demand destruction in the first quarter as a consequence of Govan, certainly hand, sanitizer surface sanitizers really across institutional on health care in particular, but also in FNB and.
Some of the other businesses were I mean, the demand spikes fast.
So too does the consumption. So we do not believe this is an instance, where there are big hoarding stockpiles being built up by customers. What you have is significantly more hand care consumption in sanitizer consumption as a consequence of this.
So it's in places where you haven't had it before that doesn't mean somebody they never garage full of stock somewhere but I don't like that that's the big story.
The real story as consumption has jacked up dramatically in these areas.
And then maybe if I could just to ask on the on the market share opportunity.
Are there things that are being done differently as you go after particularly maybe some some of the large potential customers that you've had just haven't made inroads with over the years are you getting involved directly Doug or what what what sort of are you doing really given I would assume a social business and everything you can have your sales folks doing much other than the webinars. So how are you.
Trying to make this a bit more personal and maybe get some of that business that that should always want it.
Yeah, we're certainly not following the old rule, where we would blank them with an army of people yeah, but you know were look we're doing videos were doing other ways to get and getting in front of customers. Yeah. Certainly executives are doing some doors are opening but by and large we've got a great.
Corporate account team and what we've learned over the years is these environments open doors that have been hard to open in the past and there are opportunities where some of our technology, maybe can fill in need that they now have they can understand an experience us in real.
A life or we can prove that what we're saying, it's actually true and we have several instances that going on in large health care, our customers quite honestly, but also when others and I'll I'll ask Chris talked to add a little color here too.
Thank you, Doug well Oh, if he does a fee is really so to keep in mind that customers will remember, how we dealt with them during difficult times and that's true for our existing customers, but also when we look at.
The market more broadly where the strength of our company. So get accident, you exited and the weakness is up either as a too. So we have guesstimate as we've been working with other companies in the meantime, as well so recognizing that they don't get what they're looking for.
Some of their current partners and comes to very naturally to us, which is which is a very good thing. So we obviously saw helped them we saw with new programs. We in a position where we can provide very comprehensive program, where its obviously cleaning and sunny station can be infection prevention can be pest elimination.
And can be water safety as well all the thinks that the company can provide and last but not at least two elements on one hand, well weekend supply large quantities that they need us. We just discussed all those needs of subsidizing products go up and we quite a capacity so to do that we have each was over an extended its not an.
Limited, but we could provide much more than us, but not these the digital capabilities that you have that can bring it all together in for Dan understanding how are they doing as it gets them at this is something that most companies gone too. So bottom line, yes, it's helping us, especially long term.
Our next questions from the line of John Mcnulty with BMO. Please proceed with your questions. Yes. Thanks for taking my question.
With regard to the global industrial segment I guess, how resilient are you thinking of that business acting as we kind of go through this recessionary period I mean, obviously there are some fear is on the institutional side, but this one does seem like it may it may have greater resiliency I guess, how should we be thinking about that.
Well, it's certainly not going through the shutdown scenarios that you're seeing in the institutional side. So so it has that I think what we sat in some of the transcript. We released this morning are later on this morning was we expected industrial to be fairly resilient.
Equal to or modestly below last year in total and so you've got some winners in their FNB that we've talked about but you'll have some large industrial stuff going on to Christophe why don't you talk a bit about how you see it yeah. We believe that industrial inkjet was so we'll be less impacted will be impacted in Q2 for.
Sure as most businesses ultimately, but as Doug mentioned, so food and beverage.
Well is growing nicely has been a very strong business a before covered by the way was very good programs to vary.
Nice new business generation as well and ended the men. So has just grown not only because people need more consumer goods, but those consumer goods companies. So a need as well more subsidizing programs to make sure that they can keep operating as we reading the newspaper ability. So FNB is going to keep a funding the old war.
The business as we've mentioned so we felt some demand a slowdown in in Q1, that's going to continue in Q2 to a certain extent and then come back in second half and as mentioned so we expect it to be to be flat to slightly below last year in aggregate we.
Everything we know a right now downstream is obviously, so being related so to the oil and fuel consumption.
But it's a a story of of two chapters in here the oil consumption, but he's also what we do four refineries on the stable. So no matter what out there on paper interesting business in that situation, where a busy E commerce.
Goes up and to old towers toilet paper if for whatever interesting reason so has gone up very highly over the past a few months and seems to be fairly resilient. So far so all in all kind of a stable versus last year to potentially slightly negative.
Great. Thanks, a lot and Doug I think I heard it but I just wanted to clarify so when we think about the decremental margins as we go into kind of two to Q3 Q did you say it was it should be somewhere in the 50% range is that they're right is that the right way to think about it.
I think what we're saying in total yell fixed costs.
Our around.
50% level, particularly early because you don't have time. If you will you know there there are costs that are theoretically variable in their variable over time, but they're not variable on day one.
And so thinking, particularly in Q2 around a 50 50 is probably the better way to think about it.
Thank you.
Our next question comes on line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Sounds good afternoon.
Got it following up on that.
Yeah, we already alluded to.
Capex being down probably about 50%. This year just curious about the stock process as you progress through the year and what you see how would you think about maybe doing more maybe doing less thanks.
Well I think the thought process I'm going to ask all ecolab management to hold their plug barriers for this comment.
We we purposefully took took capital down aggressively for two and but but as I mentioned, while protecting digital investments anti microbial investments and other investments and we took it down aggressively because it's easier to add it back end than it is to go for double cuts.
It's through early you do this work the better off you are so we certainly would have room in our estimation. If there are great return ideas, we're going to learn things as I mentioned before and I imagine part of that learning is going to be where we could maybe invest some smart money early for.
Outsized returns long term and we have certainly kept some capital at Bay to go do that so my expectation would be that if it moves in any one direction from here it will probably move up not down.
Thanks, Doug and just following that up on the Opex side with regard to Jim business investments.
Our uranium no real knows in this environment or is that something youre going to going to going to go ahead with with full steam and just just pop through and look for the coming out stronger on the back said.
Yeah, well then again it depends on what it is but back to the things that we're quite confident and around anti microbial program development digital both when you roll it out et cetera that takes opex costs not just capital.
We've retained all that money in the plan and its significant.
The reason for that is we know it's absolutely critical to the future was before Covance and I would argue we think it's even more important now with coal fired so all that stuff remains and what we're working to do you don't like you could go and try to say my goal is to make 2020 as good as Pos.
A couple.
And that's going to be our you know our overarching view.
For our business in our situation, we believe as a team and we're all like locked in arm and as that is not the right answer the right answer is a managed 2020 responsibly and intelligently, but really with a mine on 21, 22 et cetera and that doesn't mean.
And we're going to be foolish or anything else, but I would argue if you really went after 2020 given this is artificially induced.
There is going to be recovery Nobody's clear exactly how it's going to show up that taking this in using time to your advantage and we have the ability to do that given the resiliency of our model and frankly, our balance sheet and cash position and as a consequence, we're going to allow time.
To help answer some of these things so we know how to invest intelligently, we're not to repeat sheep businesses that need to get reshaped intelligently. We're just going to make I think move once instead of multiple times and organizations don't like multiple upsets and so that's so that's the tax work.
Taking.
You too I could care less about to be honest. It is you know will make money.
But I don't care, you know spending time on making it look less bad seems like a waste of time, it's a 13 week period, what we want our team focused on is really all the stuff we've been talking about the investment Chris tossed been talking about around digital connectivity and all that the new anti microbial capacity.
Study and ideas that we have how to leverage buyer qual, how do we develop comprehensive programs reopening and ongoing behavior for clients, who need to new stuff et cetera, That's really where we think the money is long term for and how you create value for customers and communities and that's how you create value for.
Shareholders and that's the stuff we're all over.
Thank you next questions come from Atlanta, Atlanta challenges entered with Jefferies. Please proceed with your question.
Hi, guys excuse me Dan was on for Laurence how are you.
You mentioned that.
Are you seeing some inventory drawdown I was wondering what telling stories, where before cobot within mean or normal.
Turning to compete with the industry has already have ninos when it comes to what else can actually occur.
Well the inventory drawdown, we're talking about as and let's just pick foodservice distributors.
You know I don't know exactly where it stood but let's call. It normal but what was normal is now abnormal hi, because their demand has fallen dramatically as a consequence of all the restaurants being temporary close so well was normal became too much inventory for them.
I mean, just the machine models that will be driven are based on consumption and consumption going down is going to make inventory. It looks like it's gone up so they're just not going to they're not buying their shipping more than they are buying.
And they're shipping a lot less than they used to.
Okay. Thank you and then you mentioned during your prepared remarks that headcount sensitive products.
Would go up in this allow you to introduce a new products I was just wondering what's interesting now for headcount sensitive products. How is the difference and say what you were introducing say six months ago or right before the started.
Well I made a great example is driven by Christophe and team with huge assist from supply chain and everything else is.
Look we ran out of capacity in our traditional hand sanitizer.
And so we win develop new formulations that allowed us to bill to build this on.
Different filling equipment, then we are using heretofore and start meeting inordinate demand. There are now you know what I would call hand, sanitizer 2.0 views of how that evolves from here so something that happened literally inside of four weeks is now already being re thought about how.
How do we move that insects or to even stage too. So those are examples around the world. We had a lot of our teams step up in very unique forms are on anti microbials forms we didnt sell before maybe were sold by others, but in small amounts and.
They came up with ways of meeting consumer or customer demand that we really didn't have that capability as early as January and so this the team has done a very good job being responsive what we're now doing is saying okay out of all these ideas what are we really going to bet on and where are we.
We going to put permanent capital if you will behind some of these ideas and there are few already that we want to.
Thank you very much.
Our next question is filling of Rosemarie Morbelli with GE Research. Please proceed with your question.
Thank you good afternoon, everyone.
Oh I was wondering if given the situation or is that stream.
Do you think that there is going to be any change to the current agreements you have leased up at GE are they going to take advantage of the situation in order to change something.
Well I mean the way the agreement is written is even if they wanted to they couldn't.
Our agreements our agreement Yeah, we believe still.
That this will.
Concluded successfully within the second quarter.
All right. Thanks, and then the SMB, which was very strong.
Given the impact to upsize some meat packing facilities shutting down a is that do you think going to to impact yeah, yeah that particular business, particularly in the U.S.
Well I you know protein generally is at the highest consumption part of that business for us, but I'll throw it to Christoph.
It will do a rosemarie so maybe a comment on a on SMB. So interestingly enough the plants that close down when those customers. So obviously, that's not impacting us as such to Doug's point. So does the meat business protein business is nothing major part of FNB, that's one that we contemplating mold.
For the future, but it's not big.
Right now and on the other hand, so those customers so need more sunny tizing programs that we can offer so that's all good news activity so for SMB.
Okay, and if I can ask Chris tough.
Another question you talked about what you were doing on the digital side.
Given the environment. Currently are you changing your focus on that gives you Tony subscale customers or do you think you keep moving on the same task.
Great question, it's the latter actually so we really trying to stay not even trying we all staying very firmly on the same path if anything it's to go faster and the interest of guesstimates a to b connected.
He is growing especially in situation, where we count gets to the guest <unk> well. This is a good arguments so to get connected you notice so to provide a remote service and as I mentioned before so out summation. These helping customers we use that cost. While this is something that we accelerate them because they will need it.
Even more in the next few months of quarters, whatever happens down the road.
Customers will need so some savings into total operating costs and we'd be ready so to invest more in our digital technology and Thats why so we're ramping up so here our speed of progress, we're not changing to direction idle.
Thank you.
Next question is from line of PJ as you start with Citi. Please proceed with your question.
Hi, this is their entry on for PJ.
Doug I wanted to ask how do you see the magnitude of sales decline in U.S. in Europe, compared the China I'm guessing there's some differences do they extended stay at home orders, but any thoughts directionally would be helpful, particularly in the institutional.
Well I mean, you know the situations are quite different in terms of development and frankly, you know Europe didn't they act in a unified fashion you had different countries because of disease progress at different points in time to act.
In different ways at different points in time, so there's no one answer really that that will work in Europe.
I think what we've seen is.
I would say more similar than dissimilar.
What clouds that sometimes is the person.
Hand, sanitizer can kinda cloud some of the results et cetera, us really across the board went really aggressively on a restaurant shutdown.
You had is talked earlier in Europe, a number the big countries have shut restaurants down but not all countries in certain markets. They've stayed open as is through the whole covert experience heretofore. So theres not I think one model what we've signaled I think there's plenty of outside.
Data that if you look at our largest market, which is the U.S. you've had a lot of the restaurants, either completely closed or only allowed to have pick off or delivery, which is a dramatic downturn in their business and there is public data or.
Around.
Number of transactions, which are down in the 40% to 60% dependent on the segment.
Per cent rate year on year, and I think those are good indications of the type of demand you would expect to see.
Okay helpful.
And then secondly, as your.
Growing your annuity business.
Greater opportunity and existing customers with circling the customer and.
Adding increase solutions per cow or do you see crater.
Opportunity some new customers.
Well I think is always he answers in both.
And.
Chris talked to answer on protein would be.
It is good evidence I mean, certainly there are providers, there who are a high quality and highly concerned who we have not develop relationships with overtime that we would love to develop relationships over time that would be on the new side and then within our core.
Customer base, given the new sensitivity around hygiene, which we believe is here to stay for quite a while.
Theres going to be ample opportunity if you will to sell new additional programs to help them meet new consumer expectations. So I would say, it's a great chance for both.
We'd like to have a balanced approach and have both at all times. That's typically how we build our marketing plans and so this will also fit that well.
Thank you.
Next questions from the line of Mike Harrison with Seaport Global. Please proceed with your questions.
Hi, good afternoon.
A year slide deck, you mentioned the.
Accounts receivable write offs risk was under a percentage of sales.
In the prior downturn or in prior downturns. This downturn is different a really really hitting or foodservice hospitality customers.
Can you talk kinda in general how you view their financial position and how you are thinking about the risk to.
Collections are around bad debts.
Yeah, Paul as Dan to give his perspective, and then we can add some color too. Thanks.
Yes, thanks, Doug Thanks for the question. So yeah, you're right we gave the parameter around how our our collection experience in bad debt expense trended.
After the great recession, and clearly like you.
We think that this is going to be an event of different character. So let me just say this I mean, Doug set up front and it's true we're very confident in our financial position. We go into this experience very committed to be partners with customers that we have decades long relationships with you know.
That said, we're also on our guard and looking out for our own interest and for our shareholder interest, but I'll just put it. This way maybe we will work very collaboratively with customers with the interest of helping them also assuring ultimately a great collections, we have tested our.
Bad debt experience and portfolio deterioration, a very very severely and the net of it is we remain very very confident of delivering positive free cash flow across the year.
Yes, I would add.
The disadvantage of being a global businesses, you see a lot of crises overtime and the advantage of being a global company as you see a lot of crises overtime. So if I even go back Theres, a long history of very good partnership between the finance team and the businesses and it takes both.
To manage these risks so it could even be the greed Greek crisis. It could be things that we go through in Latin America routinely experience, we had its just referenced and Oh eight or nine things we've gone through in Asia at different points in time, we have experience here.
That doesn't mean that we're going to.
Mitigate all the challenges either so the fact that there's going to be increase bad debt is almost a surety and then it's a question of how well that we mitigate and manage that and I would say we have a very capable team there.
Alright, and then what are the things that you guys are addressed as an opportunity at your last Investor Day was legionella. It seems like this is an issue when you have buildings closed for some period of time.
Reopen them. So can you talk about how legionella by factor into.
Institutional and lodging or maybe some other markets as we start to look at an eventual reopening.
You know if christophe addresses.
So the water question, so is becoming so a bigger opportunities. So for those sites. This is true in hospitals. This is truly manufacturing just is true.
Hotels because infection in general.
Come from the weakest link.
So, it's maybe a little bit coming back to a previous question as well, so saying that if we so very well the food safety risk doesn't mean that the whole infection risk. So he is reduced if we don't take you have to the water cleanliness. If we don't make sure that the past is being eliminated so that's where the company.
Hence the value of the company. So it makes a huge difference for what customers. So going forward. So the question on water is becoming more interesting.
And more in demand, especially so in institutional lending healthcare. This is true for legionella.
Just to remind each so it's it's really coming out of sprayed water is so like the cooling towers, but it's also disinfecting. So the water from the building, which is important as well and it's also getting the right quoting you have to water for any food preparation or drinks for that matter as such.
So the water opportunity in those segments. So we will rates going forward through that period.
Thank you My final question taste from the line of Andy Wittmann with Baird. Please proceed with your question.
Great. Thanks.
Wanted to get set up did I guess on the a three year efficiency initiative, where you guys are playing out.
Dressing about $325 million, a cost savings and just trying to understand.
How that cuts addressed with all the other.
Complications of coded just it does that number go up in terms of your targets savings.
Can you can really could you just give us an update of.
The annual run rate of savings maybe that you ended the quarter at.
You know the can you reiterate or update us on the incremental savings that you expect to see this year and maybe next year I just wanted to understand how that's factoring into your business plans today.
Yeah, I would say, Andy we went into the year with 130 million incremental.
Savings as a consequence of the 820 20 program.
We still expect to realize that it.
As that base changes.
Overtime, we will keep updating and let people know what's going on and how it's related to a 2020.
Right I mean, I don't know what else yeah, it's going to be interesting time, there's going to be a lot of changes, we will certainly be saving more than 130 million on SGN any this year.
It's going to be an absolute requirement given the environment, we're in but a key component of our savings. This year still is coming from May 2020.
Okay. Thanks.
Thank you at this time comes into a question answer session I'll turn to slide back over to make money for closing comments.
Thank you that wraps up our first quarter conference call. This conference call and the associated discussion of slide and slides will be available for replay on our website. Thanks for your time in participation today and best wishes for the rest of the day.
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