Q2 2020 Ecolab Inc Earnings Call
[music].
Greetings and welcome to the Ecolabs second quarter 2020 earnings release Conference call.
This time, all participants are in listen only mode.
A brief question answer session will follow the formal presentation.
Anyone should require operator assistance during today's conference. Please press star zero from your telephone keypad.
As a reminder, this conference is being recorded.
At this time I'll like to introduce your host Mike Monahan Senior Vice President external relations Mr. Monaghan, you may now begin.
Thank you Hello, everyone and welcome to Ecolab second quarter Conference call with me today, as Doug Baker, Ecolabs, Chairman and CEO, Chris talked back our Chief operating Officer, and dance you might call, our Chief Financial Officer.
A discussion of our results along with our earnings release and the slides referencing the quarter's results and our outlook are available in Ecolabs website at Ecolab Dotcom Slash investor. Please take a moment to read the cautionary statements and these materials, stating that this teleconference and the associated supplemental materials include estimates of future performance. These are forward looking.
These statements and actual results could differ materially from those projected.
Factors that could cause actual results to differ are described under the risk factors section in our most recent form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release.
Starting with a brief overview second quarter results reflected the impact from cobot 19 on our businesses and were generally consistent with our expectations.
Sales and earnings were strong for our life Sciences healthcare specialty businesses as they benefited from favorable fundamental trends and our increased cleaning sanitizing demand.
Our industrial segment saw modest sales declined but strong earnings growth, while our institutional and pest elimination businesses experienced significant sales and profit declines due to the substantial negative impact on restaurants hotels and entertainment facilities as they felt the brunt of the March April global shutdown in travel in dining.
Second quarter adjusted earnings per share from continuing operations were 65 cents compared with $1.27 year ago.
Results reflected the cobot related volume declines and negative operating leverage as well as certain cope and related impacts, including second quarter equipment lease billing suspensions of approximately 10 cents per share to support customers.
Six per share reduction in institutional distributor inventories.
And increase bad debt expense of seven cents per share.
Looking ahead, we believe were in a strong position to manage through cobot 19, and are confident we will emerge from 2020 in a stronger competitive position with a more robust offering.
Our focus remains squarely on maximizing our post cobot traction to drive growth.
While we have near term challenges that we are addressing within our institutional business. We continue to have substantial opportunities in all of our businesses and the REIT strategies to achieve them.
Clearly ecolabs, leading capabilities in food safety, kleen water and healthy environments is more important than ever and they have positioned us well as an important and effective partner in this world crisis and beyond.
As a significant part of this we have continued to work aggressively to partner with our customers to solve their problems and in doing so further improve our customer peasant penetration and new business wins by providing the critical product service and consulting support our customers need to ensure their operations are safe and function you effectively as cobot.
Restrictions evolve and their operations adapt to the new sanitation requirements.
As a result of these actions and our new sales initiatives, we have won new business and along with gradually improving markets. We have seen sales across our businesses, including institutional improved since their lows early in the quarter.
While cobot 19 creates a short term challenge. It also creates long term opportunities in a world challenged by covet, our food safety Kleen water and healthy environments positioning has become even more important we believe that our long term growth opportunities remain robust driven by our huge remaining market opportunity our leading.
Global market positions, our focus on providing our strong customer base with improved results, while lowering their water energy and other operating costs.
And our strong financial position with resilient free cash flow.
We believe looking beyond the near term uncertainty and focusing on the sustainable long term business drivers will yield superior long term performance for ecolab and our investors.
Now here's Doug Baker with some comments.
Thanks, Mike and Hello, everyone. So just a couple of overview comments on Q2 will turn it back to Mike and then to culinary.
So in Q2 results were obviously significantly impacted by covert 19. They were is all in line with our expectations going yen, which was probably a minor miracle because at the very difficult environment to predict.
The impacts were most acutely felt in our institutional business as the balance of our businesses collectively grew both sales and income during the period healthcare and life Sciences had record growth our industrial businesses had extremely strong margin performance driving strong income gains in our specialty portion of our.
Institutional reporting segment also realized strong growth.
Our institutional division, though was directly impacted by the cobot 19 shutdown of travel and dining early in the quarter. This was a one off event.
The history.
Now this event was from we further exacerbated by the resultant distributor inventory reductions and the decision we made to suspend Q2 digit machine lease payments as a means to supporting the foodservice industry. During this incredibly traumatic period.
In total these two items hits sales by $82 million in Q2 in July by roughly $60 million.
Importantly, we spent no timer effort postponing pain or managing Q2 for optics trade inventories fell and we left out the dish machine market needed support and we gave it.
Reserves and inventory, we took our full dose team size, we maintained and investments we actually increase through the quarter.
This is what we said we would do and we feel it's a smart play we will manage through the near term pain in a way that maximizes our potential long term, while the pain will continue we believe Q2 was the low point.
So while the short term pain from coal to 19 is obvious the long term impact is becoming clear hygiene standards will increase in every market. We serve they have industrial healthcare life sciences institutional and specialty.
New opportunities are presenting themselves everyday in large piece disinfecting in hand care in water and safety in clean rooms in Datacenters et cetera.
We chased the $130 billion market is the into 2019 and it will be bigger going forward, we're even better advantage to get after it we've been out investing our competition for years in our clearly this year, our digital and anti microbial investments in innovation give us significant advantages.
Customers water food safety safe environment, and operating efficiency needs are only growing in importance in our cleaner safer healthier positioning is spot on probably most importantly, our team has never so clearly felt the power of our mission is doing a great job supporting customers jumping.
On opportunities and rebuilding momentum so with that I'll turn it to Mike who will open up culinary.
Thanks, Doug that concludes our formal remarks, operator would you. Please begin that question and answer period.
Yes. Thank you.
We'll now be conducting question and answer session.
We actually you please limit yourself to one question and one brief follow question for color and others will have a chance to participate.
Ask a question today. Please press star one from your telephone keypad and a confirmation on indicate your line is in the question Q.
Let me first start to if you like to remove your question from the Q.
So just as using speaker equipment, maybe necessary to pick up your handset before pressing the star keys, one moment. Please when we pull for questions.
Thank you and our first question is from the line of Tim Mulrooney with William Blair.
Good morning, Doug Good morning, Mike.
Good morning.
On the two yeah. Good afternoon, I guess so.
The institutional division was down I think about 50% organically in the second quarter.
And this is my only question today can you just walk us through how the monthly performance trended through the second quarter, Doug and how that compares to what you've seen in July so far.
Yes, let me I'll give you a perspective on institutional and will address your specific question, while doing it because I know they're going to be questions. Obviously, I mean institutional was where coal that impact was most acutely felt it's obvious when you look at the result is I met.
And in my opening the rest of the business collectively did quite well now there are ups and downs within that group, but thats normal and institutional though being down 50% is quite notable so the sales for that reporting sector were down 35% and it was really driven by the decline in institutional specialty.
It was pretty strong it was really driven by FRS sales of plus 31% in QSR was flat for the quarter.
The institutional the Cline really what's driven by a couple things.
The most notable was that huge decline or the huge shutdown in April of literally global travel and dining and we've ever seen anything like this transactions fell in April 80%.
Now transactions of climb back there were 80 down in April 50 down in May and down 30 in June. We've also seen our business move back from this 80% type decline up through the quarter and we've seen it continue in July to your question, but we had other issue here.
A distributor inventory rebalance, which is always a natural outcome, particularly with the up a severe shock like this so we mentioned its 50 million box in the dish machine leads suspension, which we took on because we felt it was the smart thing to do for us for many years and we need to be in there with our customers who've been decade long partners with us.
To let them know that we understand the pain are going through now is a 37 million dollar decision at both sales and alike. As it's a complete pass through now we asked for trade there when we gave relief for the corner and it was just to Q2 relief Pearl ended well. We also went in traded for was an extension.
Of existing contracts and new agreement for the dispersing lease program. We believe it's going to be a great deal for both our customers and for us long term.
Now the inventory is largely behind US I think it's behind US if you start taking.
44 is actually the inventory balances 45 million take the 45 million and think is it a 30 day inventory or 20 day inventory, it's a significant expectation of reduction in enough sales that that's larger than we think you need to do but that's always the way this thing goals and we.
I also know for sure that the lease suspension is behind us for sure as a result, we're pretty confident that the worst is behind us, particularly in institutional which really as I just said as a driver for the main challenge in Q2 for the overall company now I don't think we're going to see institutional backend growth until you have a vaccine.
Okay.
People are not dining out for several reasons in some states in some countries. They are not allowed to but even where they are allowed to we've seen them slowly return because they are still exists significant fear of becoming contaminated or catching covert 19 and until that fear dissipates I don't think you're going to see.
A huge change or growth in the institutional business with that said it's come back significantly from inflow point may was better than April June was better than May and we've seen continued progress in July as well, so we aren't going to be hanging out the same levels that we saw on key.
You too, but don't expect growth in the next couple of quarters, We don't think thats realistic now with that said.
Our team is all over a number of things, which we think long term are going to position us terrifically in this market already helping customers accelerate successful unsafe reopening if you've seen there have been over 50 large chains that have mentioned us either their public statements are releases were also reengineering your end.
Nearing a plan to what I'll call over recover so the goals here or to increase our penetration in existing customers by 20%.
And we also want to do that while continuing to drive increases in the number of units, we had interestingly enough very strong new business performance businesses, but including an instant.
Pieces of business that we've been.
Because they understand our expertise our coverage and how vital it is when you are moving through a pandemic situation like covance, and indeed recovery and into a world where everyone expects hygiene to be a much more heightened piece of the puzzle for all of these operator.
Yes.
So we're also introducing what we're calling the ecolab science certified program. So it's really designed to drive heightened hygiene standards and outcomes within our customers, but also to create comfort for our customers in their gas and Meanwhile drive in pre penetration of ecolab programs in these customers to get these.
Better outcomes. So this is going to be a big campaign in a big program that we believe will position us for even more significant share gain and frankly help our customers recover quicker.
Now we also have accelerated the new technology in the field for institutional this will help the teams efficiency and effectiveness via routing remote service online ordering and opportunity identification programs embedded in this technology, we're clarifying the roles in our field organization to create the focus needed.
And frankly, we can do it now because we can leverage this new field technology that we've invested in.
So our institutional team is all over this the clearly went through shock when you had to lift through April and start seeing sales declines they've never experienced I'll remind everybody the last great recession.
As in 2009, our institutional business globally was down 2%.
This is not because there's an economic slowdown this is completely pandemic related shut down related very unique steps that need to be taken in a pandemic. It's got nothing to do with consumers spend or some minor economic recession for that that has never phases and wouldn't phases now.
What does phases is when you're not allowed to go into restaurants. It hurt sales no doubt about it now.
Now we do know this.
Our goal is not to recur.
We are moving through call that and then obviously setting ourselves up post gold it and not to say this the opportunity is huge so if you just look at the U.S. and you look at our penetration opportunity within our existing customers. There is a billion dollar opportunity in existing customers alone. So.
So it's not like we are short of opportunity globally. This market will still be nearly 20 billion dollar market post covance. So the opportunity exists where we have today.
Is called necessity necessity to make change to drive change and to get on the recovery path in the team is all over this new technology Relaunching, We've got new anti Microbials. There's been worked on for years coming out here. Shortly timing is perfect GE the right products I think we.
Yes.
Okay. That's it for me. Thanks, Thanks for all the color Doug.
Our next question from the line of them enough.
Barclays.
Yes, Thank you Doug just.
Ecolab signed said.
So I guess at that change except for using that program.
We've also seen obviously a lot of online companies using clorox and Zeiss eligible bandying like done yet in Jemaah back and so forth Maggie.
The congenial Vegas comfortable going in there.
Do you need to pickup kind of the PR marketing around the equal our brands for that just useful.
Yes, I'd offer a couple of things and I'm going to give it to Christophe for some comments too.
Number one yeah, I think there's always an opportunity to build ecolab is a is a great brand, it's really well known in the industries that we serve but it's not very well known in too soon.
Through the if you do it smartly to I think increase our or awareness in help increase and drive ecolab penetration.
The other fact that we know as we've done a lot of consumer research we've done over the years and Weve reconfirmed recently that really when you ask consumers what makes them more comfortable establishments using hospital grade disinfectant, which is what we sell or consumer type.
Products.
They are overwhelmingly in favor of hospital grade disinfectants, it's not close and I would say our customers understood I understand this intuitively and that consumers are right I mean, disinfectants at a hospital grade level kill more and they do it much quicker.
In many instances, we're doing things in 30, and 45 seconds, which the products and consumer doing in three and four minutes.
So that just doesn't work as well in a business to business environment and so I mean I think this is well understood. So efficacy is not equivalent in customers understand this consumers do sort or our customers and so building programs around these advantage. Its communicating these program advantages we think is an important.
Part of the program and I'll I'll throw it to Christophe to give a little more color on Ecolab science certified.
Thank you Doug and we've also understood that the specialty into us a two thirds.
I have to people have both the number one so cleanliness as the main reason to go and not to go.
Restaurants during December these goateed 19 times as well and beyond what Doug just said that hospital, great disinfectant. So have a much better perception, so with guest versus retail product. We've also understood that people need to see safe in a restaurant doing a hotel in order to fees site.
And it's bringing those three things together I need cleanliness to go in a restaurant I need to seek clean when I go in a restaurant and I need to make sure that the right product being used over there. So have led to that I'd have to ecolab science certified which is not saying that the restaurant just doing 100% right, but these using.
Humidity, our standards, our protocols that we've developed with them I would programs as well as Doug mentioned is was some innovation.
We've launched it so a few weeks as wed so small power disinfectant, which is killing viruses within 30 seconds.
She is it would record by your way out there as well and then we can all deep those restaurants and when they've passed everything they get the season as well, which is ecolab science certified that gets when they come in can feel it in a better place done in a restaurant that would not headset.
Got it that's helpful and maybe just my second question.
Let's see here in the U.S. you need about all the hot spots and so forth, but you guys can you a much more global business I was just hoping to some perspective on Mike.
In terms of feed trends, you're seeing to guide the improvements either like I guess I'm not sure maybe how how notable sizable why these hotspot aimed at meeting about versus the rest of the rules you guys.
Yes, well, we've certainly seen because you had say the pandemic started obviously in Asia and China, specifically earliest and so they are further along and we've seen improvement continued improvement in our Chinese in our sales in the China market.
Fact in June they were positive in total and we expect that to continue in July moving forward, but that's been a climb back from fairly significant decline as well, but they're months ahead and I would also so they have a different mix, it's more industrial than institutional than the balance of the world. So you're going to see some of that.
Mix play out Favourably as you go forward, but if you look at institutional specifically within China. We've also seen significant improvement over the period of time as well as covert has abated they're somewhat.
Each of reopened in travel as reopened with that said, it's not been a stampede back on to airplanes into hotels nor into restaurant people are still waiting for I think finality for this thing, which I think is in the form of a vaccine ultimately.
We don't believe Intel than that you're going to see complete market recovery in industries, most hard hit by coven.
Now it will improve but we don't think improved completely.
Thank you.
Our next questions from the line of John referenced with Cvs.
Thank you any way to gauge how much institutional is being supported by outdoor dining right now because as we move into the fall, we're going to lose that outdoor dining kind of late to the institutional market.
John It's hard for us to have exact I I would say I think what's going to happen in the institutional I agree outdoor we live in Minnesota.
Outdoor dining maybe over the next week or so I'm winter comes quickly here five but I would say I think you see a transition which is.
Assuming we start getting after masks and start doing things and if you get this thing back under control, you'll probably see fairly steady dining results, but you're going to see a transition to what I will call modest in dining going forward, but that's why I'm trying to be a little circumspect about.
About how far this recovery will go we do not believe you're going to see a repeat of Q2 and institutional sales by any means but you're not going to see a 5% growth rate and institutional until covance gone for any number reasons.
And then institutional customers it had to train their employees on new cleaning protocols did your lobster dotcom acquisition help with providing customers with additional training support.
Yes, it's starting to I would say well we're learning is how to utilize that technology. Most effectively theres, obviously been a lot of work done on food safety programming. When we bought lobster. They had a fairly good breadth of portfolio around our hospitality specific excuse me are on.
Lodging, specifically the food safety program, it's coming on and we're utilizing that yes.
Thank you.
Next questions from the line as David Begleiter Deutsche Bank.
Thank you, Doug just on the margins and industrial and healthcare and life Sciences. They were clearly exceptional in Q2.
How should we thinking about them in Q3 and the back half of the year.
Yes, I have to Chris off a minute industrial was up about 450 basis points.
I would say half of it while to 200 of it was really TNT and bonus.
Right take back as a consequence of slow sales in that segment, even though it's got outstanding.
I wouldn't said if you didnt have Colgate you would add the same level of earnings. They would have just come a different way, but with that let me give it to Christophe I mean, those the industrial business cold in healthcare life Sciences is also performing quite well.
Good. Thank you Doug So David as you comment so on the on the very good progression on margin, which is better way a continuation of what we've seen as well prior to Q2 note that the same level.
It's true that almost half of to improvements so has been driven by variable cost.
So travel and entertainment and commissioned bonus distribution of thanks, obviously that happen.
When people travel less and less as what same time, but the true formula So for the margin improvements in.
Industrial is the outcome of many use as well.
If you've seen the pricing, it's close to 2% we were 3% so.
A year or two ago.
Leading to would probably more to do one so into future, which is I was steady course, but having 2% in an environment like that so easy is quite remarkable and how do we get there.
Ultimately outdoor.
Two main drivers David the first one is to type of innovation that we can provide.
Busy so to customers they pay more and always multiple products and programs that keep improving and we invest a lot. So for that and second is the fact that we commit as well to other customers for operational improvement or total cost of operation reduction basically, saying if you work with US you told at cost is going.
On a go down and we take part of that improvement as well.
To our pricing and the second driver is the fact that raw materials have been reasonably be nine over the past quarter. So if you bring it all together that's driving so good margins for industrial and the story is very similar in a different environment.
It's especially Sony Life Science, which is kind of an industrial business as well so was similar approach and has scare.
As well with pricing thats, a bit lower than in industrial pizza closer to one.
On to two in industrial but to Formula is quite similar.
Very helpful and though just someone new business wins, you mentioned that will result of cover 19.
Can you give a couple of examples of exactly what those accounts were and how they progressed during this crisis.
Yes, we don't give names.
And having in the past and I'm, probably not going to set a new precedent today.
Give me I'll give you some examples are or what drove it I mean, one is a.
Very large operator in the lodging environment and this is a piece of business that we had been able to secure for for honestly 15 years and it was several things, but most notably it was just his understanding of the capabilities that we had in the knee.
Needs that they had and how important was to partner with somebody who can help you through the most difficult challenges.
And so I think it was this recognition and I will say when the team shared with both Christophe and eyes that they had one this business because both of us of at our crack at running the institutional business individually, we never got it done, but they did and it was really a quite significant.
When it was also a huge blow to a key competitor in a number of ways. There have been then many other instances of businesses that we haven't really been end that suddenly we have fairly large stakes going because of their need for disinfection at a different scale.
In a different way and so when I mentioned earlier my comments large space disinfection. There is this need and clearly in many of our customers think hotels and others and we've got technology to do that but we also have a technology and bio quell which is an acquisition. We made you on the last 18.
Months that enables us to do very unique things from a disinfecting standpoint, very safely and so that technology is now moving an expanding fairly aggressively out of its home environment, which was historically life sciences into new markets.
Who understand and see the need and our learning how this technology can help them disinfect when they have a contaminated site do so quite safely without any people involvement. So theres a number of these things that are occurring it's not just occurring in our sphere, but thats why they say that.
Market. So we're going to have some market changes and I think our 130 billion may turn into a $140 billion. It sounds like every market is going to go up equally X percent, you'll have some markets that are a little impaired but in total in hand care alone you've got a market, it's going to probably triple and then settled down a doubling.
On a long term basis, we're going to see hand, sanitizer everywhere for a long period of time in hand sanitizer sales. If you can make it you can sell it at this point in time and so we know they're big changes in these changes are going to have a lasting they're gonna have legs going forward.
Maybe not an exact peak, but there is certainly going to be more sanitization more concern more awareness going forward and we recognize that and we're making sure we're positioned to capitalize on it.
Thank you very much.
Our next questions from the line of Gary Bisbee with Bank of America.
Hi, Thanks, guys.
Interesting that you're targeting 20% increase in penetration I think that was related to institutional clients and maybe as more broadly on on the other side of this and I guess can help us understand what would the components would be to deliver that and really what I'm trying to think through is like how much larger can unit level.
The on the other side of this when customers are are following.
Higher hygiene standard.
Yes, the 20% I referred to of the goal of increasing unit penetration was institutional I mean, everybody has a goal of increase penetration.
Oh I get asked the question a lot or have over the years you know whats.
What percent of our growth do we want to come from new units or form from penetration right now in institutional we want a disproportionate coming from penetration.
It's something we can control it's stuff we can get after you know that if you end up with larger penetration you automatically start overwhelming all kinds of economics. If you in prove the you know the shop per drop I mean, how much you're selling per.
Service call per delivery per everything else all the economics improve its sitting there and I would say the team has got very clear view of what needs to get done. So certainly ecolab science certified is the umbrella idea under which it's going to help.
Drive penetration, but the field technology also ultimately enables us for each call to identify every time one of our people pulls up to an account what the opportunities are in that account because it's tied to our ERP system.
So just being able to manage differently, how do we think about structuring our deals at the change how do we end up structuring our agreements that distribution and how do we end up structuring our deal at the end unit in terms of encouraging more of our product in our sale now this deal doesn't work.
Mark if it doesn't work for the customer.
So this has to translate into customer benefit you can't curriculum, you've got a have a deal that when they buy more from us they are going to have cleaner outcomes and better operating income as a consequence of this which is just what Christophe described and industrial the promise we have been delivering it.
Institutional for years, but its reengineering that program, specifically around a greater array of products and programs to deliver that outcome in foodservice and logic.
Okay and then the follow up in fact, if I could just follow up on the earlier question on margins that health and life Sciences and industrial.
I understand the drivers of a discretionary cost being being a portion but.
As we think of the next few quarters to some of those costs come back in <unk> or.
Anything to help us understand how those could.
You know trend I mean health Elton life Sciences up 800, 900 basis points is just a massive move right should we think that.
That.
Spending comes back in any color would be helpful.
Yes, I mean life Sciences, I mean, it's a little bit of the magic.
You saw the the other side of it.
When you're up 50% good things happened a lot of money flows through right I mean, just drop so when you're down 50% I guess, we prove this quarter bad things happen right in the opposite so I think life Sciences is it's been a profitable business will remain a quite profitable business, we would not say.
Say that Thats, our terminal run rate to 50 top line or the 800 basis points at the below but what we do know in life Sciences as they got very good momentum a lot of very smart new business programs that they are driving they've had a few one offs here as a consequence of some of the bio quell.
Sales that we've had that we don't believe repeat long term so with that said, they're going to have very healthy growth on the industrial side I'll give it to it I'll give it to Christophe to answer.
Yes, Thanks, Doug.
Gary what's important is due to get a little bit free coffee as well so the evolution that weve. Ed. This is the type of underlying margin improvement that we going to continue to see you you're right that the discretionary spend so he is going to go up as people start to travel again, not as much as before but it is going to be variable states.
On a go up but at same time, the leverage is where the volume leverage in our operations. He is going to improve because that was a negative a busy so doing that time and ultimately.
It's important to keep in mind. So these does pricing momentum that we have between deals one and 2% which is being so positive for very long time, and we have no intention to see dropped below zero for sure not sites to keep so between one and two so as long as we can get that in that room. It to you as.
Remain so as they are now.
The leverage and the discretionary we'd compensates of fleets out which will lead to similar type of improvement we had pre Cobb it.
Great. Thank you.
Our next question is coming from the line.
Ryan Connors spending a scattergood see if your question.
Great. Thanks for taking my question today, it's a big picture question really wonder.
When you can kind of talk about you know kind of the big picture of the federal response.
To co that I mean, obviously, the shock and all that we saw from the fed and from Congress has really key.
Stabilizing things in particular from any of your.
Institutional customers, but there seems to be in emerging debate about the unintended.
Consequences of that and how that kind of.
Suffered for natural creative destruction, and a calling of the heard so to speak. So what are your thoughts on that in terms of how that impacts your industry in your business. Both in terms of competitors, who made have been price based competitors, who would have been vulnerable, but now they can hang around through PPP money or whatever and they don't become acquisition opportunities or they don't.
Maybe go away and then also in terms of customers in or other small mom and pops that compete with your strategic accounts that maybe would've gone away that now now we'll hang around and prevent your strategic accounts from gaining share.
Yeah, well that is a big question.
I would say this I I think even when you look I think a lot of the early federal response was was frankly much more right than wrong.
He funds the businesses and they get to keep the funds as long as a key employing folks I mean, if all you do is fund people. The problem is there is no employers left to re employ them post event and so I think they took a page frankly out of Germany. When they went through the key.
Prices back in the two thousands and I think it was a smart way to go hopefully there's more of that in traunch three in terms of doesn't keep the walking wounded alive I don't know I think you're seeing a lot of people opening and really just opening to ultimately gobank.
Dropped.
And to walk down side, I think you're going to see enough creative.
This destruction as is as a consequence, Nicole good in many industries, not just in foodservice and lodging, but retail and others as you go through.
And so I think you know the third tranche needs to go consider that but the biggest driver I believe is really fear.
And if you start looking at.
What's really going on and I alluded to this in China.
So China has this under control in many respects I mean, all the reported respects and you still don't have the same level of activity in retail or in dining or in travel and that's not driven by government programs or anything else, it's really driven by.
People's fear that they could contract coal, but again and they are reluctant to do so so the big thing that needs to happen I mean, the government to got to do smart policy to figure out how it keep the economy moving on life support at minimum I agree with that but we need a vaccine and we need.
Better treatment, which is calm, but ultimately until I think communities.
So confident that they can start gathering again, you're not going to see a normalization or re normalization of the economies period, you will see recovery, but it's going to get stalled at X point now that that's what I believe so I think that's a big piece so the government could.
Do anything work and make sure. The vaccination development is moving in that we are prepared to make billions of doses. Once it's available. So there you go.
That's really helpful perspective, thanks for your time.
Our next question, it's from the line of Chris Parkinson with Credit Suisse.
Great. Thank you.
Doug You mentioned you are.
Okay.
3100, $30 billion market at the end of 19, which will likely be bigger in the years to come can you speak to your assessment of your positioning.
For that growth is the focus still on a few key initiatives just broad initiatives, such as enterprise selling and.
Digitization in customer stickiness. It just trying to get sense as you know how you are rethinking or how you're further evaluating customer contract grows and the opportunity to expand their within.
Yeah, well certainly the ones you mentioned in our remaining as top initiatives.
We know I mean, the digital work that we've done thank God, we invested in digital the way we did in any company that did has been really.
Prospering as a consequence of this.
And I mean, when when Christophe just walk through what's going on in industrial a lot of this stage has been set over the last several years, where they worked very hard to better wire customers remotely and also equipped to field with technology that enables them to provide services. They couldn't before same is true and.
Institutional we're doing amazing things remotely that we couldn't have done just two and three years ago and the ability to do this has given US great advantage I'd also say, it's giving us great insight as to where we need to continue to drive digital innovation.
Innovation and anti Microbials, which has been a prime focus of ours for 15 years, where we identified we had a major all to be quite honestly, that's proven to be invaluable. We have the best portfolio, we have new technology Christophe just alluded to one it we've got another launch coming up here in two weeks.
That really is couldn't be better timed in terms of ease of use simplification chill breadth and kill time.
So all these things matter terrifically as we go through but value capture making sure that we are able to articulate the benefits of buying from us not only environmentally operationally, but economically in the big advantage. We have the way we go to market is well we.
Create huge environmental sustainability benefits, we do it while simultaneously delivering huge economic benefits. So when you get into rough economies. That's the reason we've historically continue to sell successfully we may start talking about economic benefits in advance of and by.
Our mental benefit, but they're the same there of the same DNA in the way we go to market and so we believe ultimately that has a pretty resilient way and operating model to execute no matter what the environment is.
Got it and there's been a lot focused obviously on some of the bigger isn't institutionally full service restaurants in lodging et cetera based on.
How does strategy just articulated to me can you sit on there are some other areas like utility launch of care.
You take yet or on their past and health care I think you already spoke about a little bit how are those turn into back half the year. Because obviously there is an argument that those will actually gained momentum versus some other businesses, which obviously will be more subjected to the actual macro rebounds pre.
Vaccine so just what your thoughts on that as well. Thank you.
Yes, our appetite and interest in the institutional markets, including some of the segments you talked about catering as well as lodging as low as foodservice as well as long term care anticipated one iota, so you're going to be and remain huge opportunities. We have outsized advantage in those markets. We believe.
Clearly that.
We will be setting record sales and a lie in those markets in the years to comp. So they believe and we believe those are terrific opportunities for us they are going through like a legendary impact as a consequence of the pandemic and we'll see this through they'll see it through but I don't know this this imagination.
That somehow nobody's going to be die cutting out any longer long term, where it's literally a tradition that thousands of years old and only built over time I just don't buy.
Why do I think that lodging may take a while to recover yes, it's 7% of our portfolio as a company right. We can overcome some dance in some parts of our portfolio, we have to deal with it all the time.
These things, but we are absolutely every intention is staying absolutely laser focus in the institutional market. We take our advantages here are gonna grow not shrink.
Thank you.
Our next question is from the line of John Mcnulty this being much.
Thanks for taking my question.
You spoke in the beginning and their release around around kind of the de lever that you're pulling in terms of the the equipment leasing and now that's going to that should be a positive for you as we kind of look to Threeq. You are there other cost levers that you are actually looking at in terms of in terms of tailwinds that we might be able to think about as we go into threeq.
Q or or are you really just more focused about the service side and at least for now kind of the costs, maybe aren't as big of focus.
Yeah, I think as I mentioned I would say that's I think theres two if you're just looking at sequential I mean, certainly there's a 37 million dollar lease.
Suspension costs that will not repeat in Q3 I mean, the other is.
Inventories have been largely taken down in the institutional business, we certainly wouldn't expect to see a repeat of a 45 million dollar take down and distributor inventories in institutional and you've got the tailwind in institutional of coming off the April lows.
Right, which progressively increased and improved.
Through the quarter. So even if you're just stalled at June 30, you will have significantly better outcomes in institutional as a consequence of that so I mean those are three factors and then the other businesses. We think there are similar tailwinds headwinds as you go through that quarter.
New business has been productive and all of them. We would expect once we can get into an install to can you just see the benefits from that as the year progresses as well.
Got it and then and maybe just a question in the in the deck you had highlighted on the full service restaurants side about 80% or open.
But there are operating at at 50% dining capacity.
I know your your products aren't necessarily a one for one but I guess, how should if there is a restaurant a typical full service restaurants that you're servicing and it's now running at 50% capacity.
What does that mean for ecolab products again, barring you selling more to them or what have you in terms of in terms of targeting them for for different different avenues like how should we think about how much of a step down that would actually be.
Yeah, it'd be less than 50.
Ill call it 65 70.
Oh pursuit of sales, if you had 50% plus business or like US 30, 30% hitting sales roughly.
You've got just turning on the dish machine and running it all day.
Consumes chemical you've got to clean the kitchen at the end of the day, whether you serve one meal or a 1000 meals right. So there's a number of fixed pieces, but a big pieces, obviously variable if you're not dirtying tables, you don't have to clean them, if you're not dirty table clause you don't have to clean up if you don't have many dishes.
You don't run the depreciated the same rate, but but it's not a one to one on the way down.
Got it thanks for the color.
The next question comes from the line of Vincent Andrews with Morgan Stanley.
Thanks, Hi, everyone. A couple of quick ones from me just maybe a close the loop on institutional if I add back.
Suggested the inventory.
Additionally, saying and presumably a good portion the bad debt expense that theoretically gets me to it.
Its level of of earnings in the second quarter, and then if I think about adding volume back in the third quarter, just trying to understand what the inkwell margin should be on the on the volume that comes back sequentially.
And I understand what the inkwell margin should be on the on the volume that comes back sequentially.
When you just said Mike Your spreadsheet Hill.
Let me today on that side.
I you know.
Look I can.
Put put it this way.
[music].
Yes.
More than a why that falls down I don't know, you're giving you a specific percent because I don't know everything that you've moved in there I mean, you got components of it that would be part of the total so I don't I think it's it's not safe for me to go give you like a specific percentage on on that type of question I apologize.
No worries of beat makeup on it later.
And then it just as a follow up just on the you know the working capital obviously, you talked about what happened in inventory, but.
You know receivables and payables you didnt make much progress on in the second quarter Im just wondering if there's a plan for that in the back half over should just sort of assume.
Current current current percentage rates.
Yes, I'll have Dan answer this yes sure. Thank you.
So let's talk about it may be in part so on the accounts receivable. The total number didnt changed dramatically, but there was a lot of kind of dynamism I guess, if you look at what drove it. So unquestionably we saw increased aging of the accounts receivable portfolio as customers paid more slowly.
Some of that likewise was was behind the increase calculation of accrued bad debt expense, which which we've noted.
We got to big benefit, though I mean as sales start to come down you get a significant volume favorability in accounts receivable. So although it didn't look on a net basis like it was a very exciting space. It was when you looked into the details of it and let's just say we've talked at length about expectations of volume and where we think we are in there.
Coverage from a from a rate perspective, and our collection efforts I will say again, what I said on the first quarter call, which is I think we're all over it look we've made it think about this lease lease billing decision that we made we have made concessions to customers, where we think that they were smart unnecessary.
We are predicated on customers, who agreed to be current right and which is an important point to be made similarly.
Just to be very blunt, we expect to be paid for the value that we provide and so what you will see going forward in the third quarter. For example, my expectation is that as volume ramps that will consume cash in the receivable base and that will be partly offset by our continuing effort to collect and to improve the performance.
That portfolio from a rate basis on the payables side look it's a much smaller cash flow to begin with I think that we did the right things similarly to stretch the payments as we had the opportunity to do it we want to be good customers for essential providers at the same time. So the net of at all as I think that we've been risk.
Sponsel prudent fair minded and fair to our customers into our vendors at same time.
Very clear and I agree. They said thank you for your response.
Our next question to align officials on the rosenbaum with seasonal.
Hi, Thank you for taking my questions Hey, Doug are you seeing any difference in the appetite for hospitals to do more program buying that was always like in issue in terms of the health care gross debt was just a change for the way that they were always looking for the lowest cost you guys sell on the.
The best value overall.
With what you're selling in your ability to service them and stuff and just the increased interest in hygiene and sanitation is that changing the mentality over there or is it too early to tell.
Well I think it's too early to tell like as covert change should I will say this pre corvid, we're having more success driving programs they continue to grow faster than the business.
Underlying business rate, even now, but a lot of that is because of programs that we put in place right. As we went and pre Colvin I guess, what we believe in the healthcare the acute care space in particular is certainly.
Their sensitivity to hygiene is at an all time high and we do not believe it falls to pre covert levels post cove it that it to lift heightened hygiene awareness standards and frankly, we'll be spending more on outcomes. We think all of that as a positive.
For us going forward I would also say I mean, our team as you recall, we had a recall that was in December of last year in our.
European business or on your business and that team did a great job working through that recall getting back to and frankly accelerating production levels beyond what they had pre recall and getting through all the government.
Expectations.
And moving forward.
What we've seen is I would say great appreciation from our health care customers, because we're able to meet their needs I think a larger appetite for better technology as you move forward and if you really are spending more in hygiene, you're going to be more concerned about doing it wisely, which benefits program.
Selling.
[noise], Okay, great just for my follow up can you talk about how broad based the pricing was it just 2% pricing in this environment seems a.
It really good in if you could talk about.
What the different puts and takes were around that.
Yeah, I mean, you know we had 2% in our institutional segment reporting segment, 2% in our industrial segment.
You know health care was as I think already mentioned.
Around half that rate as we went forward life Sciences was around you know too so it was pretty widespread.
As we've talked we expect this.
If raw materials remain benign, which was probably more likely than not given just industrial situation.
Globally.
This is probably moves down to 1% over a period of time, but we don't like zero or negative.
Thank you.
Thanks questions from the line of Scott Schneeberger with Oppenheimer.
Thanks, Good afternoon first one for me.
For guard is regard to a capex you mentioned a quarter ago, you've got that by about 50%. This year, just curious how you're trending and it's on the in thing is one of the supplementary pieces that you anticipate.
Cash flow net negative this year. So just wondering how you're thinking about that in that context, and then how you are progressing on that new plant. Thanks.
Yeah, I would say two things we ended up in the quarter to be it down about I don't know, 35% versus last year and more like 40% to 45% a plan. So what happened was honestly, there's a number of good ideas and we learn things and we wanted to invest in them and our cash flow in the.
Quarter, what is proving to be better than let me just say some of our most severe models for sure.
And we're quite confident we will be successful with positive cash flow through the balance of the year each quarter. So we're through what we believe is likely going to be the biggest stress test on cash flow being this quarter given the dramatic decline in institutional sales, particularly in April and then the and then the ramp back that we've talked up.
About going forward on capital capital is going to be down year on year, let's just assume it's in the same level because we've already approved a number of what I would call. We think smart investments and what we don't want to do is under invest in this business given our optimism for what post colvard world looks like and we don't.
And to be sitting there flat footed when it occurs one of the huge advantages we have versus competition, we've been out investing them I think we've been out innovating them and we want to continue that plan because this type of stress makes people pull back some don't have any choice because they will have negative cash flow given there.
If you will customer portfolio much different than ours and as a consequence, we want to take.
Full advantage of me a position to meet customer needs going forward with the innovation they need post covance.
Great. Thanks appreciate that and then a quick follow up to pick up on a something you'd mentioned earlier, Doug can you kind of left that you talked about bio well is.
Obviously mentioned that they said that the lead driver in the quarter in life Sciences, and you said that it is transferable to a lot of order.
End markets usage as just curious if you take that a little bit farther out anecdotally I've heard that people have stayed in hotels and had something that they perceived is similar to what to what I perceived to be and as you know that made them feel very comfortable in a code environment. So I'm, just curious how broad or what type of potential Tam that could.
The relative to pre covered world. Thanks.
Well I'll answer a broadly I mean, we'll we'll be exactly bio qual technology or other technology the way efforts based disinfection I'd say.
Time will tell we're doing a lot of work on both but certainly the bio quell specific.
Technology has applicability outside of its typical or legacy whole market of life Sciences, we've already seen it used broadly in health care, we've seen it used and and we've got inquiries in a number of institutional markets in other places and so I don't want to get into specifics in cost.
Summers and everything else, but it's it's fairly broad, but we also have other technologies that we think may play a role in some of these markets do they would be potentially less expensive right to use in smaller spaces and bio quell and so we know it's not going to be a singular answer but.
It's going to be a broader answer and I think the team's been very smart we have a lot of an individual initiatives and we're working to tie it together to make sure that we have a collective view of what's available around the company to go meet these needs, but to us its spells real and significant opportunity going forward.
Thanks very much.
Thank you. My next question is from the line of Laurence Alexander with Jefferies.
Hello, a two quick questions.
So first on the institutional margins can you get back to the 2019 levels.
Ben loan sales.
To that.
Yes, I would say I don't think we've seen our peak margin an institutional.
All right I mean, we're not going to get back there this year that's for sure.
And you know, it's going to take a while ago March back there, but is there. There's nothing I know that says that institutional doesn't have the ability to set record sales record margin a record income levels going forward.
Right, but I guess I'm trying to get out his can you get to the same margin as last year at a lower sales run rate that last year or do you need to get back to within 5% or so to get the same margin.
No I would say you know some of this look.
Unless I'll answer a theoretical question with a theoretical answer or answer it and I don't mean to be cute on this.
It's you know some of this and what we've been doing is making sure we understand sorta what the situation is going to look like in our markets before we take.
No real action now, we're doing a bunch of things to equip our businesses to be much more agile in the fields and I talked about fuel technology. The acceleration that we're doing in institutional as we've done in industrial and other places. This gives us the ability to do a number of things, but if you wanted a theoretical and you told me that I was going to.
Live in a world with less units, Okay buy sell more per unit I will make more money.
Period, and I don't need to get exactly the same level of sales simply because everything I do becomes more efficient so theres always ways to engineer the business. If you will to overcome whatever it is that the world's going to throw out you well we need to make sure. We understand is what is it that the world.
Throwing at US what is the market change we have a lot of guests is out there, but what we want to watch is make sure we understand it and we will design to win in that market. So we could do with less volume and make the same amount of money, which would be a higher margin.
No I you know you can't do it at half the volume, but you could certainly do it at any normal expected potential pain, you might realize post colvin for a short period of time or even a couple of years.
Then I guess in that context can you talk a little bit about what you've seen in the Chinese recovery, what you've learned and so that where you started to serve narrow narrowed down the guesswork so to speak.
Yeah. This is the reason is oh, several we've seen I mean, we've seen recovery, we haven't seen exactly the same volume per units were adding units I mean, the big difference between the Chinese market in the U.S. market for US is just share.
And so we're we're solving a lot of the prop there because we do know the label and we got really small share we need to grow it. So we're adding new customers and I would say the environment lends itself to that because of our what I would say our reputation capabilities et cetera, our lending themselves and playing.
Well in that given environment, so, but that's going to be a little different situation than you would have say in North America, where you may have higher share any more fully developed market and there you know we may have to call a different play depending on where we think the market settles right we have a better.
Idea today than we did three months ago, but we will know a lot more in three months than we do today and what we want to make sure. We do is the right move.
And we're doing the right steps to enable the few moves we think are going to be possible and probable but being premature on this thing we think would be a mistake.
Okay, great. Thanks.
The next question comes from the line of Rosemarie Morbelli. It was GE research.
Thank you good afternoon, everyone.
Well.
Okay.
Okay.
<unk>.
That's not growing at 5% of yet see or anything suing Keith I don't think so how much of any improvement.
The only client Genesis hotel chipping teach in order to actually the you know flattish we tend to being Satish.
And you say upgrade at 40% capacity utilization or keeping see rather.
Can you do they.
So it seems like ours.
She can acquire indefinitely and gained 40% factor facility.
Well you know there's not a.
Complete.
Theres not an easy answer like 59% I I would say you know I think two things are going I was there is certainly theres been temporarily demand destruction in the lodging and dining markets I mean, there's.
Indisputable and now part of that has also been overcome by increased spend within these places on hygiene.
So if you walk into a hotel today, you were going to see and Christophe alluded to this where you talked about Ecolab science certified program part of what people want to do as they want to see clean. So interestingly were before people want to hide cleaning public areas from the public and.
Not do it until off hours there now doing at 24 hours they want the public to see this happening in their increasing cleanliness frequency in virtually every part of the establishment. So that's gonna. If you will mean you can get back to same sales at lower occupancy what.
That exact math is I mean, we're all already I mean, we're we're literally weeks into this thing as we go through there would that said we saw you know I would say better recovery in U.S. lodging in the second quarter than I would've guessed going in and it was quicker in some regards in other markets, which is an interest.
Thing outcome and so we'll all watch this but we don't need to get back to the same exact level that have the same if you will spend per location.
Okay and then.
And then looking yield.
Emphasizing husky gold grade sections that are currently or nearly units you know that Uh huh.
Okay.
You say I'm not sure properly it said he doesn't matter what they use.
So screening then is there some kind of this education and would you be held responsible Richardson said you cite that let's say on doing it thing too in depth team area.
Yeah, absolutely and all of Chris I'll give some color yeah. When you are a key component of the science certify program is in unit training of employees.
In some of this is gonna be done through lobster type technology and much of it like its is done historically is also in person training and development, but you're absolutely right. I mean, if you don't if you don't take a disinfect and out of the bottle that doesn't kill any germs. So you need to do it properly what the advantage we have with our accelerated kilter.
It is it's much less sensitive to procedure. If you have four minute requirement for dwell time that has a huge training obstacle because it's not natural what's not what we do people don't spray things and leave them on their for four minutes right to kill that's just not what we all believe.
Steve is necessary, even though it is actually the requirement and I'm going to has christophe to get more color. If he wants to around some of the training and certification efforts around science certified.
Yeah. Thank you Doug will gold mine. So the idea of sign certified is really the chicken audited IDN and you know we know that pizza point in time, we should be going every day in order to make sure that everything is right, but but we want to make sure. It's like any company. The accounting standards have been defined what you expect to people to follow.
All of them and into all of the dam, that's a little bits of the same approach animal volatiles world. Obviously, so in the kitchen onion, a restaurant, but it's a really defining we stem what are the standards what are the protocols. How do we trained people what are the programs and as Doug mentioned, so we're trying to have programs as simple to use this weekend with the math.
Hmm impact in terms of killed time, any terms of efficacy as well and IDN of today. So to have these audit and at the same time as well, having I would show to managers, so who is coming as what it regularly in that restaurants or to make sure that things are being done the right way. So it's really still projecting so.
The you need to be the right procedures and at the same time, so weve Ecolab science certified to seize that do we see on the door that the guest coming in get some level of comfort as well, we still see clean versus just a few team.
Okay. That's it.
Mr.
Next question is from the line of Andrew Wittmann must bear.
Well. Thanks, my questions have been asked and answered.
Thank you.
The next question is from the line of PJ Juvekar with Citi.
Hi, Doug, it's Eric Teetering on for PJ.
Oh awesome, new contracts come up for renewal in the institutional market and in terms of your new business wins, our customers more willing to source incremental product from ecolab or is there still mentality to diversify supply.
Yeah, I would say there hasn't been one just on the short answer is I mean, there anywhere from three to five years on average right you know our contracts I I always see this I don't I don't ask investors take a lot of comfort that we we don't I mean, if I.
<unk> customer wants to leave us because were poor performing.
Then we do in hot Sue I mean, there's a few exceptions, we give capital upfront and do some other things and we have spelled out requirements, but we operate like every one of these contractors renewed every day. It's the only way that you continue to grow share in these industries I would say.
Okay customers typically I mean, we have very good penetration in a number of our chain wide and deep and so there is not.
I would say built in reluctant in the industry to do this I think what we need to do is continue to sharpen the way, we articulate the benefit of doing yet of having the product portfolio ours because in every chain, there's always a gap or too. So every play.
It's we go we know we can sell more as we do it but it's not a simple thing of they have this you know purchasing mandate of having to suppliers. That's not the situation. We see we address security supply, which is a very real invalid concern by making sure that we manufacture.
In multiple sites, we have multiple avenues to supply customers, even when we're in Seoul supply. So they can't be victimized by a bad event say, Oh unfortunate hurricane or tornado or some other natural disaster that knocks them out and us.
Okay.
A question.
Customers on the institutional business currently use the hospital grades disinfectants, and where do you see the market opportunity that grow that too and related once you see a a mix benefit.
Yeah, I would say the roots of the disinfectants, we use in those businesses our hospital right I mean, one of the real advantage, we've had being in the health care market is you see the emerging pathogens first there and so you learn how to treat them and deal with them and then it helps you as they start migrating.
In other institutions around the world. So the bases there, but its christophe alluded to in a recent launch and I talked about earlier, we have several new very important developments in that space that is just in the process are rolling out which enables us I think.
To help customers have more resilient programs because the kill times faster. So it's less procedure sensitive. So those those things are just starting to roll out literally now.
Helpful. Thank you.
Thank you.
At this time is come to the end of our question and answer session and I will turn or Slovak to make money hand for closing comments. Thank you that wraps up our second quarter Conference call. This conference call and associated discussion on slides will be available for replay on our website. Thanks for your time, a participation and best wishes for the rest of the day.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect. Your lines at this time and have a wonderful day.