Q3 2020 Ecolab Inc Earnings Call
[music].
Greetings and welcome to the Ecolab third quarter 2020 earnings release Conference call.
At this time, all participants are in listen only mode a.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad as.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mike Monahan. Thank you Mr. Monahan you may now begin.
Thank you Hello, everyone and welcome to legal EPS third quarter Conference call with me today is Doug Baker, Ecolabs, Chairman and CEO Christoph back, our President and Chief operating Officer, and Dan Schmechel, 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 on Ecolabs website at Ecolab Dot Com Slash investor. Please take a moment to read the cautionary statements in these materials, which state 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 back.
Factors that could cause actual results to differ are described under the risk factors section in our September 25, 2020 form 8-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 third quarter results showed significant improvement from the second quarter, while still reflecting the divergent impacts from COVID-19 on the business segments.
Fixed currency sales and earnings per share declines narrowed as we leveraged recovering customer end markets with new business wins increased customer penetration and cost efficiency actions to show the sequentially better results.
Sales and income for healthcare and life Sciences segment were strong as it continued to benefit from good underlying business trends strong cleaning sanitizing demand and several large onetime sanitizer orders.
Our industrial segment saw a modest sales decline as end market activity returns toward more normal levels, while income growth continued to be strong due to pricing and lower costs.
Institutional Division results also improved from the second quarter as consumer activity within restaurants hotels and entertainment facilities continue to recover the traffic at them continues to run below last year due to coated related restrictions that yielded the lower institutional segment results.
We expect our overall improvement to continue in the fourth quarter, though likely at a slower rate at the second cobot weighed impacts reopenings.
We remain confident we will emerge from 2020 with a stronger competitive advantages and a more robust product offering.
We continue to invest in the key drivers for our business our accelerated investments in hand care and sanitizing capacity are paying off and our continued digital investments and accelerated field technology deployment are enabling us to provide excellent customer support even where we cannot be either in person, while also enabling better value delivery and further efficiency in our core.
Cost to serve.
We remain firmly focused on maximizing our post covered position.
While COVID-19 creates a near term challenge. It also creates a long term opportunities.
In a world challenged by coded our food safety clean 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.
Our energy and other operating costs.
And our strong financial position with resilient free cash flow we.
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 and now here's Doug Baker with some comments.
Thanks, Mike and good day, everybody. So our sales and earnings showed significant improvement in Q3 versus the lows. We saw in Q2, which was expected.
This has led principally by our institutional division as its markets reopened, albeit partially.
Our healthcare life science businesses continued to accelerate with our third quarter sales up 29% and our industrial businesses performed solidly as well was negative 3% sales part 18% ally growth.
Importantly, we expect the overall improvement to continue in Q4, though at a slower pace as Covance second wave is expected to dampen reopenings.
Even so we have a number of initiatives underway as the opportunities and challenges presented by coal that are much clearer now.
Lab Science certified program is helping drive improved penetration in existing customers.
You recall our objective for this year was to maximize our position for post cold that success and we are well on our way to do that as a result, we feel we will be in very good position, leaving the year as we look forward, we expect coal that to run into 2021 fairly deeply meaning.
Through several quarters, but we also expect our business to continue and strengthen as our capacity innovation new market entries Ecolab science certified in digital efforts put us in a great position to manage and grow our business. So I feel really good about the steps our team has taken how they've managed through this period and Molson.
Quarterly how they position us for success in 2021.
Thank you.
Thanks, Doug that concludes our formal remarks operator, please begin the question and answer period.
Thank you well now be testing and question and answer session.
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One moment, please help me pull for questions.
Thank you and our first question is from Tim Mulrooney with William Blair. Please proceed with your question.
Hi, Doug.
I know, there's a lot of uncertainty right now and a lot of moving parts between your different segments, but I think a key question for me and what's on a lot of investors minds. This morning is based on what you know today when do you expect to get back to 2019, EPS or better.
Yes, well thank you Tim.
I'd say, we're not giving specific forecasts, but I'll.
I'll say this.
Even with Covance second wave and I think Weve, we understand where covance going we track that very carefully meeting all the recent news reports about what's happening in Europe whats, helping us is not really news to us per se that we've considered this in thinking about our business progression even we.
Talk about further improvement in Q4, and how we're considering 2021 that doesn't mean it couldn't be worse than we anticipate or could be better than we anticipate but I don't believe we are underestimating cove. It with that said I think we are in good shape to be playing above two.
2019, EPS in 2021, the question is really how much.
We've got a number of things that give us confidence the markets. We believe are going to be better on average in 21 than they were in 20, principally because we don't expect a repeat of a global shutdown. During the March April period that alone drives on average a significant impact.
Movement, and just the underlying market performance.
Inventory reduction is really behind us dish machine rent relief isn't going to be repeated a lot of the one offs that we had talked about that we took purposefully in Q2 and we know we have gained share. We've got very strong innovation. We've added capacity on hand care, we're honestly, we could sell more.
If we could make more and now we're able to make more and ultimately we know we're also taking steps to lower our costs. So we feel we are well positioned next year, we've got a number of leavers to Paul and so I I expect sitting here today that we will be certainly above.
2019, EPS in 2021.
Okay. That's really helpful. Appreciate your thoughts there I'd also like to ask about your new business wins, and how that trended through the quarter relative to your expectations are these wins coming.
Coming from developing growth opportunities or is it more just from recovering end markets.
I know you've got a lot going on with new Sanitizers in science certified for example, so I was curious how thats all affecting the cadence of your new new wins.
Yes, hi, its Chris talked to go address but we've been I would say very surprised at the strength, we were worried or early in Cove. It with the fact that we couldn't make in person calls in the same manner that we did prior impact our ability to get customers to yes, and that's turned out to be.
False worry we've.
We've actually performed very well through this whole period, I'll give christophe and opportunity to give you some color.
Thank you, Doug and Jim So good morning, or good afternoon. So yes, new business has been going very well this year, when we think year over year growth of new business that we track so on a monthly basis.
Basically growing at the same pace as these used to be as well so pre govt, which is.
Very encouraging.
Doug is right. This was saw installing that new business has become a bigger challenge, which means that our full book of business ultimately will help us as well down the road, but weve leveraged as well as digital technology, so to do that in unbelievable ways, where we could install new customers all remotely so we've learned as.
Well and those that get the abilities that we can use.
As by Tomorrow and to your question.
On the main drivers I'd like to come back as well to what we discussed during our previous calls as well when many customers are coming to us because they're looking for our expertise from a science perspective as well.
How to de risk of it how to make sure that day guests or customers. So can be protected as well thats been a huge drivers so for many new customers. So to come to US. It's also innovation, Doug mentioned, our new Sunny Tizing programs that we have the killings. So COVID-19 in 30 seconds.
Or less doors, our world Records out there.
And thats coming out of years of innovation, as well and last but not least.
In more difficult economic times, our customers like our proposition AFSAT driving that total cost of operations down which drives more business as we head towards us. So net net new business generation is kind of steady even versus what we had pre covet.
Yeah ill just add because christoph on said he'll be humble today is from an operating standpoint, our businesses have done a great job performing in a tough environment and honestly have dramatically outperformed competition in our ability to meet our customer needs when it's required.
In unit, we get there we've worked and leveraged remote digital capabilities and this has really been led by Christophe and all of our teams out in the field and that has made a big difference here as well.
Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.
Thank you good afternoon.
Question is just around this increased focus and activation that can do you guys.
Benefiting from.
Maybe a two parter. The first one is you talked about you now in a more capacity in hand cab as just curious if there was any update on.
Any other areas that may be used to I was trained in terms of how much you can produce and 19 for the first time as I sell an equal that AD on TV.
Hi, Thanks, I guess is that trying to target.
A little bit more branding the clorox isn't like those at the world.
Yes, I'll touch on the capacity question, our capacity challenges really have been around hand care in particular to a lesser extent to some surface sanitizer, it's all driven by demand, meaning our hand sanitizer business is up 303 acts.
Now we've had to do a lot of work to be able to increase capacity three acts and now we are expanding that beyond that because demand is greater than that.
These aren't easy easy ramp ups is you go through this right. This is GMP you've got to make this properly we don't take shortcuts, we're not the guys using bad ingredients people can count on us and so we're going to do this the right way so customers continue to count on us going forward, but demanding the operations team has done.
Really a terrific job working with the team to to move these volumes up and we have a lot of capacity now just coming online could take months.
Oregon equipment, we found very creative ways to do this regarding the TV Ecolab Science certified let me give that to Christoph.
Thank you, Doug and IMF. So good to hear you you can obtain certified so you something kind of new for us. So we learning as well as we go was really meant to support our customers to provide reassurance for their consumers day guests.
For the most part so in hotels and in restaurants, and it's been really driven by the fact that we knew that guests.
They're fearful.
About the risk of infection, and we all know that we knew as well at the same time that hospital a great disinfectants were driving them. So two to one time services to retail brands that you mentioned as well as before so that was a plus clearly.
As well so for us and the third thing was really that we knew we heard from guests that they won't need to see clean not just to have people telling them.
Safe out there all that brought together this fear of being infected the fact that youd like I'll speak to the great Disinfectants. The fact that you want to see that it's clean and safe. So led us to this concept of ecolab sign certified that has been extremely well welcomed by our customer.
It is.
Their customers seem to be liking it a lot as well so great reaction from customers, we really working now.
In the rollout of all those thousands of sites as well so around the country and from a media perspective, it's just after a few weeks so hard to tell but early indications are way above average than what we had expected.
Okay got it and it is nice to hear the comments on 2021, EPS, but maybe just on fourth quarter. It stands I guess.
Tom just believe described that it sounds like fourth quarter won't even if there is a new stage in some cases et cetera. So it won't be as bad as the June quarter that maybe somewhere between that and the 10th quoted that you just reported in terms of maybe partial lockdowns on impacts would you say that's a fair characterization.
Yes, I think.
Q4 is one you're entering Q4 with a very different run rate from a market consumption standpoint than we entered Q.
Right Q3.
And so as a consequence.
You've got room, I mean to get to get to even equal right you could add some degradation through the quarter just fundamentally we expected some of these locked down or just being announced but we knew that covance second wave was real coming in there is going to have to be some reactions to this and so as that.
Consequence, it's in our mindset now it could get more severe than we anticipate and everything else, but we expect Q4 to be better than Q3 on the topline income on EPS on an absolute basis and on a relative basis versus prior year I mean thats. So.
And I think it's with our eyes wide open but this is a wild world and we're here to react to what we need to react to and we'll do the smart things long term. This business I think is in great shape, and we're going to manage intelligently. The one thing I'm not going to do is cut key investments in Q.
For and do some other things because are really what is paving the way for our very positive feelings about 2021 and beyond.
Thank you. Our next question is from the line of John Roberts with UBS. Please proceed with your question.
Thank you your institutional organic sales were down 28% year over year, what's your estimate of what the market was down maybe to give us some perspective on the share gain.
Yeah, it's not as easy as just doing the straight math simply because.
Cuts down 50%.
We're not going to be down 50%, there's just some base level of consumption. In these units. If they are just open. So the numbers that we have shared in the deck and others is over 90% of restaurants in the US were opened by the end of third quarter running at a roughly 55.
5% capacity rate now in addition to that they're doing a bunch of off premise, but obviously off premise doesnt generate much ware washing business as you might imagine if you've been an off premise customer. So you know.
I would say.
We certainly.
Our volumes are are.
Healthier than the restaurant volumes in total we do believe we're gaining share because we track very carefully what we're gaining in what we're losing and I would say our losses have been minimal.
I mean, we've done a great job on the other side securing a bunch of new business through this period.
And then water downstream sales were down 11% petrochemical was up so refining was down more than 11%. It didn't know if that is surprising or not but I thought the utilities the steam system and the cooling tower were relatively insensitive to the refinery operating rate.
Or is that not the case.
So I'll give this a christoph our water businesses improved.
You are talking downstream and you're right downstream was.
Worse in Q3 than Q2, Christophe you want to.
That's right, yes overall picture so industrial is in a very solid shape.
As you've seen so off modestly.
Up so double digit.
Of note is driven by a few great businesses, obviously like water being one of them food and beverage really good water improving very nicely on downstream you underline so petrochem, which is positive this is really true.
Otherwise so for the fuel refining business, we kind of in line with the with the consumption, which was down 12% roughly in the quarter, but when the oil price is low.
Refiners have a tendency to go so for light crude which means that they need much less of our additives as well, which are usually use so for harder to treat as well product. So generally.
We like soda in the petrochemical, which is where we focused most of our attention, especially going forward.
Thank you our next.
Next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you Doug you guys increased your if your savings this quarter to $335 million from I think to 70.
Where those additional savings kind of it's coming from and with Covance impacts.
Go well into 21 are you looking at additional temporary or interim cost levers to pull to offset these headwinds.
Yeah, I'll have Dan answer specific questions around numbers, but.
Yes, I would say a couple of things.
What we wanted to do is allow time, so that we could see more clearly where we are.
Are you going to be hit save for.
Several quarters at least or even a couple of years like we've talked about lodging recovery and some other things and we are starting to adjust our costs in businesses that are going to have more lingering effects. You might think also we are investing in some businesses like healthcare and life Sciences, where we expect fully.
Impacts to be positive and so we have increased 820, 20, which was the program that we had in underway, which is really a place for us to put early move there they were not a big impact at all in Q3 will start impacting Q4 somewhat but the major impact.
Next will be in Q1, and Q2 of next year and Dan If you want to add some detail.
Yes. Thanks, So im just as you've indicated right we've announced that we've taken up the.
Full year target from 270 to 335 and of this incremental 65 as Doug has indicated they anticipate that the big bulk of that say, maybe 50 million.
We will fall into 2021.
With a little bit recognized in 2020, not much frankly, given the fact that were you can imagine starting where we're starting now near the end of October and a little bit of cleanup in 2022 in terms of what drives it I mean, I would I would go back to sort of how we're thinking about.
A 2020 or this cost savings initiative generally which is some of this is reorganization a lot of it frankly is driven by getting back benefit from the significant investment that we've made in institutional and as Doug has indicated.
We're really similarly sitting here in the era of Cove, and taking a look at our deployment, principally and where we might see continuing benefit and so of the 50, it's pretty evenly spread frankly across.
The industrial business opportunities in supply chain to where we true up and have an opportunity to think of improving efficiency of some of the lines.
And some also in the institutional business not surprisingly.
And Doug just looking longer term given the impact covert on institutional is this the institutionally fast growing business plus covenant was pretty covance.
Yes, I think there's going to be I mean, institutional is obviously ground zero for coal that and there's going to be some knock on effects for a period of time, but not forever by any means I would say I think if you read most lodging forecasts people believe that bill.
Business trip.
Travel will be down for several years, but will start coming back it will be replaced.
Fairly short order, but I think lodging takes a couple of years to recover I think restaurants recover a lot quicker and the reason for that is if you look at the history of recessions and everything else even in restaurants or go out of business. There seems to be an inland for line of people, who think opening a restaurant is a great idea.
And that has been true and you end up with a lot of let me just say capital light opportunities. After that these recessions if strip malls with restaurants in them that are vacant where they are looking for somebody to move in and put a sign on the door and get back into business and it's sort of a time honoured tradition. So so far I would say.
We've been surprised at the fact that there is not more restaurants out of business.
During this period.
We expect that there will be more particularly as we get into the winter, but it's still probably below the forecast that we had internally last March and April so institutional ultimately we feel very confident will be a and continue to be a great business now we can get to earnings.
Right growth faster than we'll probably get to sales record growth simply because we're doing a lot in the business. Some of this was planned pre covert a lot of the technology moves were doing the efficiency moves we've accelerated the deployment I mentioned this in my opening comments of the newest and latest fuel technology.
Which gives us a lot of new capabilities and makes our field team a lot more efficient and gives a much more time to sell we are adjusting our field service team to what we expect to be service requirements going forward and efficiency benefits, but we're actually adding sales fire power.
As you know coming through this an out of this we.
We want to go out and secure the new business, that's going to occur there are other forecasts that say in 2021 mid sized chains and others will be adding a significant higher number of units and theyve done in recent years as they work to capitalize on this too and we want to be the guys. They're getting this business.
We never mind, taking if you will SGN a risks like this we think they're wise, we think they're going to pay off and help us recover even faster and if we're wrong. They are not hard to address.
Thank you the.
The next question from the line of Gary Bisbee with Bank of America. Please proceed with your question.
Hey, guys. Good afternoon, I guess might go back to the cost program for a second a good.
Good to hear about the incremental and where that's coming from and the timing, but can you just give us an update on where you are versus the initial plan.
Call. It was a significant number in growing number from 19 to 20 and then into 21 are you on pace did you pull some forward given the challenges of this year or is there still an expectation that there is a significant step up in the original plan next year before this 50 million incremental that you're.
You are adding here.
Yes.
So this is this is Dan again, let me.
I'll just walk through the sequence here, we announced the plan right, which was originally 200 and took it up to 325. So we accelerated it of that 325 $55 million was focused directly on the upstream business and so those cost savings and all of the.
Incurred expense associated it went went with the champion ECS business. So that's how we net down to the $270 million and frankly, we've described this 270 million as $200 million in run rate savings for Ecolab, and then offsetting $70 million of what were essentially stranded costs related to the separate.
Ration of the champion ECS business, so thats thats the background on the 270, if you focus on the 270 I would say that our our capture of that opportunity has been almost exactly in pace with what we have said, okay and so now we're saying that we're going to increase it by 65 for all of the reasons that I.
I went through the biggest part of that benefiting and falling into 2021.
Got it. So so there is but I mean I have the 325 breakdown what you provided a few years ago and so I understand part of that went away, but it was like $80 million 90 to 105 in 2140 and 21 with the initial target. So I'm, assuming a lot that went away as in 21, maybe but so there is a significant step ups still.
From the original plan.
And then you're adding on top of that.
I would say, yes. It came from the 200 to the 270 that was the step up really though I would think about that as an offset to the.
To the the champion.
Champion ex stranded costs, what we disclosed as incrementally benefiting 2020, originally was $110 million at and.
It will be essentially that number with a little bit of increase related to the $65 million increase so.
I view this as being once we expanded the plan for the first time, if you net down to the 270, which is X. The champion expertise, we have been pretty much in line with the targets year by year as Weve communicated them.
Yes, I'll only add that what we said very early in this and we were asked are we going to make cost adjustments even back as early as February and we basically said look were in the fog a war, we don't know what moves to make right now we need this for argued to clear it really have more understand.
In terms of where the opportunities are and where the challenges are going to be what is what's going to linger and what's going to go away quickly and as a consequence, we are sitting here today with much more clarity around what needs to happen moving forward. So we're much more confident taking steps that we don't believe.
We are going to cause any unintended harm and other moves the team I think is in a great place everybody understands and since we're adding in some businesses and subtracting and others, even where we're reducing our team we have opportunities to create for them and other businesses which were.
We're making available so were differently than we've done in the past. So these are moves were taking so in an institutional we're certainly taking steps, which I mentioned around field service costs in particular, given number of units and the efficiencies that we have generated as a consequence of the technology.
Estimates and all the digital investments that we've been talking about over time, you would expect us to do those and now we have a better understanding of the lay of the land and so we're taking those steps and if anything I would expect us to take.
More not and this is not internal that's all been discussed, but as we start getting clarity around the financials, what that means and what it means for 2021.
Thank you our next question.
Line of Ryan Connors with building a scattergood. Please proceed with your question.
Great. Thanks for taking my question I wanted to ask a question about you talked about the fog of war does one of the things that seems to be emerging from that is that the the big chains are out there taking share if you will or faring better than some of the mom and Pops restaurants. As an example, but I guess, that's a number different industries that would seem to me.
Favor a company like ecolab that that presumably is having with some of those big National accounts can you talk about that dynamic and whether you think thats meaningful and how that affects you. If that does in fact continue the next couple of years.
Yes, I mean could it can only be a net positive for us.
You know how it exactly plays out in terms of their ability to continue to garner share vis-a-vis smaller players.
We watch the same trend.
I believe they will gain share during the upcoming periods, probably even more notably during recovery.
They are poised to add units aggressively and would be in a position to do it even faster and in some cases and say smaller and mid sized player.
Players. So I would say, we're not it's hard for us to say exactly what this means to us, but I would say to make a case, it's a negative would be hard to make it's net positive for sure.
Got it Okay and then my other one was at risk of going across the valley is it where you talk about investments in capacity in hand, Karen Sanitizers in the three X demand growth and so forth, obviously, you're not the only one making those capacity investments and if in fact things normalize.
This vaccine that even if that's a year or two or whatever out there how.
How do you guard against really as a company and as an industry, adding too much capacity and then we've got a negative pricing cycle in those product lines. Once this all kind of.
The dust settles here.
Yes, I would say, there's there's two things.
One.
Here's our expectation in the hand care market.
We think in the near term it probably and this includes hand soap which was obviously a much larger market than hand sanitizer in total.
The combined market triples, and then settles as a double.
Versus prequalified.
Theres certainly a covert bubble here, but the post covert will be at a run rate much higher than the pre coal that simply because you condition people through this round hand hygiene, which by the way is a smart thing to do to prevent many other viruses than just COVID-19. So.
With that yeah, our people going out we're not the only guys, adding capacity, but I would say prior to this we were also doing a lot of co packing. So we are now in a place where we have additional capacity if it proves not to be as wise, we can in source stuff. If we need to so I think we've.
Got a number of options here and we wanted to create more options. If you would going forward in terms of all how price war.
Second a work that well here.
Even the hand care dispensers falloff walls things happen, we have been priced at a premium in almost every one of our markets were the if not the global leader right number two in the world in terms of hand care and we do it at a significant premium because.
Service does matter even in this market. So I don't think we're.
I don't think that's going to be the play or the conversation, we're going to be having in two years.
Yes.
Our next question comes from the line of Chris Parkinson with Credit Suisse. Please proceed with your question.
Thank you very much. So you know, it's a little bit, but just wanted to get a little bit further budget. Despite a lot of noise in the institutional institutional revenues right now.
How should we be thinking about the current market share gain environment is still seeing despite a lot of noise like you're outperforming a lot of your peers.
And then also just when we think about the growth in the innovation investments how did those ultimately factor into your expectations for your framework offer 21, and 20 twos. It just any additional color would be greatly appreciated. Thank you.
Yes, well I'll just put together what we've already said on the call and maybe a different context.
One we have we have confidence that the business is going to be playing above 2019 in total next year.
Right from our earnings standpoint.
We don't believe institutional is going to be fully back log.
While we're doing that which we've all said.
Institutional will ultimately have record sales record earnings we have not seen the peak of institutional by any stretch because that market will come back we think foodservice first lodging a little later the good news is foodservice is much larger and their underlying trends in foodservice, which are positive we are gaining share which means.
I think we'll even beat the market getting back so I guess the point as I think when you look out beyond the depths of coal that you.
A number of positive earning machines right within this business.
Slavery of institutional over the couple of years so fast.
Faster recover in industrial and some of the other players.
Technology lowering our cost to serve on a permanent basis, it's Rob So I, we feel like the steps that the.
Stuff we've done the last six months I think has long leg that was the whole idea. We didn't want to go do a bunch of stuff in the second quarter that would only help the third quarter. We wanted our stuff you have years of benefit.
Not weeks of benefit and I think thats why im proud of the team you can get very flustered. During these periods. As these results are hard to report.
It's not what we normally do but I think the steps will prove to be very wise going forward I don't think we're very far away from getting back to the type of reports people expect out of us.
Great. That's very helpful and just very quickly on the industrial front.
There's been a fairly material divergence between end markets.
Just versus your initial expectations, let's say coming out of the second quarter can you just that your performance in SMB water and downstream and then similar to my questions on institutional how would you also view.
Your own the relative end market performance on a go forward basis. Thank you.
Yes, I'll give this christophe Scott this.
Hey, Chris Hi.
Maybe starting with your industrial question and then I'll cover it.
Institutional so as mentioned overall industrial saw is in a very solid shape.
So slightly off.
Sales, but income up.
18% and that's the advantage we have that we have so many different end markets as well that we serve but all driven by these needs of water purity and hygiene food safety as well, which are obviously is a big trends right.
Right now so when we think in terms of the water businesses the.
Where we call them. So this one has improved very nicely so from a minus five to minus two.
In Q3, and we expect that to improve as well into into quarters to come.
FNB, which has been a very strong franchise.
Because of it.
Has remained fairly strong positive for sure during coffee as well Q.
Q3, being a little bit of an unusual quarter out of two reasons.
One is the total shutdown of brewing.
In Latin America, I know the allowed to produce beer basically over there and we have a huge business over there extremely strong extremely profitability as well, but thats going to come back, but I'm not going to stop drinking beer, obviously and dairy is wanting to us which is related to schools as such but this is very temporary new business is really strong.
If and be good momentum great relationship with customers.
Dave No one even close to us who can really bring so water on hygiene as mentioned before so.
Very strong position on industrial and institutional Lotus.
A lot has been said obviously before firmly believed that people are going to go back ultimately saw to what we call out of home as such people are not going to start cooking from scratch. So in the long term. So in these trends are going to be positive at the same time people are going to look so for more demonstrate.
Safety in restaurants, and hotels. This is well to our advantage they're going to look is was a formal expertise. This is ecolabs strengths as well that we want to have global standards as well that you have in every unique anywhere around the country of the world where this is what the offer to customers and last but not least.
As well as such well, it's mostly driven by corporate accounts as Brian said was asking before do we stood up a business all large customers love.
Well Thats, where the growth is going to come from and Thats, where we have most of our focused institution long term is going to be a positive story as well so I hope it helps Chris.
Our next question comes from the line of John Mcnulty with BMO capital markets. Please proceed with your question.
Hi, good afternoon. Thanks for taking my question. So looking at the at the other segment and it seems like its mostly going to be driven by past.
The profitability surge pretty dramatically compared to kind of the revenues were but they were up but but not nearly to this degree was there a bit of a catch up in there or I guess I can you can you help to explain kind of the the incremental margins from from Twoq to Threeq, you in that business and and help us to think about how how to think about that business going forward.
No I would say within their past.
Our pes business I would say recovered even stronger than we had thought it would during the third quarter was down 2% year on year in the third quarter and they made up a lot of ground.
They have done a number of smart things in that business and are poised to break through the growth number even in the fourth quarter. So all of those businesses. It's probably the most significant in terms of its ability to earn money.
And most of that's probably the biggest positive story coming out of the other segment.
Got it and then maybe just a housekeeping question, just because I admittedly I've gotten probably a dozen emails on this since you've been talking but.
So when you talk about EPS growth in 2021 versus 2019 I assume that's on the 512 base the kind of pro forma of the oilfield services split basis that is that right or am I thinking about that right.
Yes that would be our new nine that would be the 19 number we would compare to.
Thank you.
The next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thank you.
Just thinking about trying to bridge institutional a bit more and I'm looking at that slide four you provided in the supplemental data in particular Im just trying to think about the multiplier effect of a product using co of it and what percentage of operating rates and full service restaurants, do we need to get back to in order to kind of.
Make you whole at 2019, these presumably we don't have to get back to 290% or something like that just given.
You know more product being used and likewise for lodging so any thoughts there would be helpful.
Well, we don't have a specific number to throw while it would be less than 100 I.
I think the truth of the matter is your there's going to be this natural I would say recovery.
Ceiling.
Until you have vaccine.
Now what we believe is vaccines will be approved here in short order, but they are first going to go to frontline workers second to TEP populations at greatest risk and then broader populations beyond that and you need a significant number of the population to get its going to take quarters.
Right to get this out and the reason I bring this up is I I really think we will continue to see improvement in institutional some on the top and the bottom line as we go through this I don't know that you are going to be breaking through 90, percents and others until you get real breakthrough.
On coal that to be honest, we've watched in other markets Theres, just a fundamental fear factor that stops people from going in the environment. Even when there is a low corporate rate now in improves its got clearly room from this 55% number but I don't think a bus through 80 until you start seeing.
Overtime with that said, we don't expect institutional to be fully back in 21, but we expect to be certainly playing.
North of 19, EPS and 21.
Thanks, just as a follow up just thinking about the EPS chain a line into.
Into next year, you're down about $165 million year to date I'm just trying to reconcile you have some discretionary cost saving that maybe some of that starts to come back later next year versus the cost program.
Such or that you're running to take things out so how should we be thinking about M&A trending into the fourth quarter and then how much do you think it can actually stay down next year.
Yes, I think the discretionary savings E T any in particular and some others I think last well into next year you know our view.
We're going to respond to what actually happens on Cove and not what we believe we believe covance here through a good part of 2021, if that proves to be wrong and it's it goes away faster than that will benefit and vice versa, but our travel is they're going to do isn't going to change dramatically Intel colvard restrictions.
Change in so there's a sort of what I will call natural benefit lined up with sales.
Sales pressure, so we think for the majority.
Certainly majority next year, we're going to see depressed TNT travel as a consequence, we will not bring it back up to a 100% of 2019 rates for a long period of time, because I think we've all learned they are probably our number trips we took in the past that we didnt need to take and we will be using digital technology in Medicaid.
Yes is that prior we took trips to accomplish so travel is not going down to zero, but it's not going back to 100% of 90 either.
Thank you. Our next question from the line of Scott Schneeberger with Oppenheimer. Please proceed with your questions.
Thanks, Good afternoon.
With regard to healthcare and life sciences and gas rate certain.
Certainly is impressive how sustainable you think that is in the margin. In this segment was very strong just curious how much was pricing other factors for the margin expansion and maybe some discussion the sustainability of that thanks.
Now I'll go over to Christoph.
Thank you, Doug Hi, Scott saw it needs to be done.
Another great quarter. So if what he said this group so.
So 29% topline growth 82% income.
Income needs being driven by both.
Businesses in there, so healthcare and life science, both way into double digits, all topline growth and income growth as well driven salt from one part because of it.
On the other hand as well.
A lot of Gavin.
Government business as well that we could conclude as well.
In Germany in the UK in Australia, because of the expertise that we could provide as well so to those agencies with whom we have great relationship thats going to part D stay into future, but its going to ease as well over time whenever coffee just going to ease as well so thats back to doug's comment of.
The vaccine and how many quarters.
We'll have to wait for that but online when we think in terms of underlying gross Weve said, so far has scared that if you exclude those big one timers, it's roughly 12%.
Applying but.
Thats still driven by the third wave as well so when that eases as well we believe that we will be selling has scared saw kind of 6% to 8% under.
Underlying gross which is really where we always wanted to be so ultimately thats a business that has truly benefited from what's happening here and on life science. It's.
It's a business that's totally on fire.
It's really an industry that loves what we do for them New business is extremely strong innovation is very strong as well think bio quell as well so has grown 100% during the quarter as well in Q3, while those offerings that are going stay as well going forward. So it's not going to stay at the same high level is as much.
You've seen in Q3, but it's going to be double digit underlying so going forward for sure.
Thanks appreciate that goes on in the fall Treaty are done just curious now that you built out capacity significantly for human sanitizing.
Just curious kind of on the on the backend the supply chain well into considerations you made so that if we get into a situation where the.
Well this largely sit down shutdown on it hopefully that doesn't happen again, but.
And that's been done largely domestically near short just just curious this thought process and the strategy in developing that budget.
Thanks.
Yeah, you know our historic supply chain strategy is to make in the currencies, we sell them.
The.
If you go to China, we have multiple manufacturing facilities. They are really designed to meet China demand and like 93% of our China volume is produced in China. So that's been the historic strategy and its a strategy that governs us going forward.
It was really designed because we didnt want currency to become a strategic problem.
Produce in U.S. dollar gets stronger and our competitiveness has weakened everywhere else that was the initial reason for it. Obviously has also proven to be a good strategy in a tariff world in a more restricted supply world. So that strategy has been let's say.
Cemented at this point in time is a good idea so where we are building were building a lot of the capacity in the us and in Europe, which our two largest markets where you'd expect but we also made capacity moves in China too.
Thank you.
Next question comes from Atlanta to Laurence Alexander with Jefferies. Please proceed with your question Hi, EPS.
Hi, two quick questions on the cost reduction moves that you are now, making how will that affect operating leverage on one conditions recover.
And secondly longer term question I guess.
I remember most of our discussions on the healthcare side being around anti Microbials.
Can you speak a little bit about your.
An antifungal.
All right.
More into last the last couple of words garbled when was the last question about healthcare anti microbial sorry can you can you speak about your capabilities.
It's been golds, but the anti microbials.
Yes on healthcare I mean, if you want to go I mean spores are the biggest challenge right C. diff and the others and we have significant advantages in that category in health care as well and so that.
Thats been an area that I would say, we have some standout capabilities to the health care capabilities.
Our important not just because of the healthcare market opportunity, but also because of if you will what we learned in health care and how we can apply it in other businesses. So Christophe talked about the positioning that we're using in Ecolab science certified which is healthcare grade.
This into hospital grade disinfectants that resonates with consumers all by the way there right because the breadth of the kill claims and the kill time are much more advanced in those types of products than they are in consumer products, you're going to have a consumer product literally takes four.
Minutes to kill what were killing in 30 seconds and the problem is not many people wait four minutes for anything anymore. So this is an important part of what we are doing the leverage question. I mean, we don't have a specific answer I mean, as we get out and articulate.
The complete program it will be pretty obvious what the leverage impact will be but certainly it's going to improve leverage which I know you already know.
Thank you.
The next question comes from the line of Mike Harrison with Seaport Global. Please proceed with your question.
Hi, good afternoon.
[music].
Doug you mentioned this reduction in on premise dining are your restaurant customers are shifting towards more takeout and delivery and some are coming up with these novel ideas like ghosts kitchens are creating meal kits to help make ends meet or survive in this challenging time.
What kind of changes are you, making in your approach to help your customers navigate this trend toward less on premise dining and how do we think about kind of the future of your business. What we used to think of as were washing being kind of the anchor or the cornerstone of your institutional business.
Is that going to be shifting toward hard surface cleaners going forward.
Yes, I'd say two things I mean, there are certainly new business categories in institutional that we are pushing in exploring that frankly, we think we'll have staying power no matter, which way the industry goes with that said.
I would say, we think post covert the industry reverts back to principally on premise.
For two reasons, one diners want.
Mostly and to the profit of takeout given packaging and other is not great if.
If you're in the pizza business, it's hard not to make money on pizza because the ingredient costs is so low and all you got as a cardboard box, but when youre getting into let me just say some of these fancier meals in the packaging cost and the RASK I've been referring to are actually in the restaurant business. It is it is not a perfect solution for them.
They are trying to keep the doors open cash flow moving and everything else, but their preference greatly would be to be serving these meals on premise versus off we have supported goes kitchens, they've been long long standing in a number of ways think about food trucks and the rest they are going to have a place going forward and it's probably.
Way to Ron just a delivery business.
But there will be modifications in this industry is a consequence of covance, but I don't think its a revolution.
All right and then in terms of the food retail side, you mentioned expanded cleaning protocols and frequency can you give us a sense of how much that increasing sales right. Now like is that typical grocery store customer for example, using 10 or 20% more of your product or.
The double how much they would typically be.
Well I think it's settling down where its double digit op in consumption.
No. It's I will also say you've seen slowly a number of retailers.
Curtail some of the cleaning that they were doing early it's still up versus where they were pre covance.
Were you had maybe four people wiping down every card you may have one or you have current wipes and some other things all of which go to go to consumption. We expected. This so I think what you'll see you'll see certain categories have benefit going forward, but right now in the institutional business I mean.
The number one volume stand out is the negative impact on were washing.
Which by the way is where we have a lot of our innovation and money it will come back but until it does right you got to mix challenge in institutional doesn't get fixed until this should start getting washed.
Thank you.
Question is coming from the line of PJ Juvekar with Citi. Please proceed with your question.
Hey, Doug good morning at their teetering on for PJ.
Can you talk a little bit more about your growth opportunity in these new fast kill cleaners, and how long does it take to reach peak sales in your view and then as these viruses mutate can you talk about how is the cleaner is over the long term and whether or not you reformulate.
Yes, I'll turn it to Chris to off on this and they have quite a bit of staying power.
As you go through and there's different ways, you kill organisms and I would say for instance, hand sanitizer to alcohol basically destroys a sell so its hard to develop immunity to its beer. If you think about it that way some do poison and you can have immunity built over time to.
Poisons, but not to everyone and it's not a fast issue.
We're using clots that still have effectiveness that have been around for decades right in a number instances. So it's not it's not a short life in terms of our business careers. It's a short life in terms of human history. So I don't know if you want to add in terms of Christophe how long it takes to get to peak sales et cetera.
The only thing I would offer is that we really watching every pathogens.
Out there so the ones that we know well and how do they react so against our products as well how do our products are effective.
Against those the new ones as well go of it being one of those that we didn't know.
Obviously in the past and we learn from each other the.
The latest disinfectant that we talked about so today was just extremely fast key time.
Steve It up for the neural virus for instance, so we really look at all pathogens out there try to understand what type of effectiveness. How we succeeded working is there any reaction to it as well and generally so we develop our innovation in order to stay ahead of that so I believe that we are in a very young.
The place, especially compared to any competitor out there.
Okay.
Just maybe talk Christoph.
Sales related to that question and then for my follow up Doug.
As end markets recover some management and talking about building out their M&A pipeline or returning the share repurchase. This so ill ecolabs net leverage has improved the low twos can you discuss both use the cash thank you.
Okay. So I'll take the first question and give the M&A parts at two to Don just in a second to your point on the peak annual assays, we usually.
You take five years, which is the best average that we have out there some product so sometimes shorter term, but most of them are longer than five years. So thats whitestone metric that we use on M&A done.
Yes, I'll interpret it more as a cash priorities question. You also asked a question on share repurchase. So let me let me just say this we ended the quarter with a little north of $1 billion on the balance sheet and cash which is.
By any historical standard a very very big number for us So yes, thats the premise for the question right.
I will follow the threat of a lot of the Q and eight today to just say that the world remains a very uncertain place.
And I'm comfortable with the amount of cash that we have on the balance sheet. Partly this is a cash is king environment and Theres a lot of who knows what is to be seen we are getting increasing confidence as you've heard from the tone of the call today too about the shape of the world with many uncertainties yet to be known I presume that as we go forward it will it.
We'll present, both increased challenges right, maybe some unforeseen, but also opportunities and so I guess the shortest answer I can provide is that as our confidence continues to build.
We'll see us return to more traditional cash levels and cash priorities, including share repurchase and M&A activities. Okay. So.
Thank you.
The next question is from the line of Jessica with JP Morgan. Please proceed with your question.
Hi, Thanks very much.
Revenues declined $250 million in the institutional business and institutional operating profits were down $200 million why is the decremental margin 80%.
If the decremental margin were 50% you would have earned double what is it about the business where the incremental returns are so high.
John by year on year on third quarter to third quarter.
Correct.
Well I would say a couple of things they won't be 80% over any long period of time as you go through this.
But you get into quarters.
Now you're getting to what happened last period, you get into bonuses.
Bonuses, where you don't are taken down and up in different quarters in different years for different reasons. These can have impact as you go forward there are other investments or bad debt and some other things as you go through this period, but our our decremental margins either going down or going up over a period of time.
Market to be in the 80% range. The gross profit of that business is right in the mid Sixtys right on and the good day. So a lot of that's going to happen. We are starting to take decisions on fixed costs and other things and so what we will see is a recovery of those more.
Margins as we go forward.
We're we're raw materials down about 5% year over year in the quarter.
You know raw materials in total we're not a material impact if anything they were negative in institutional a lot of that is stuff you're seeing around heightened demand in hand care in some other areas, where you really just have shortage of supply and then.
Industrial year on year Minorly favorable.
Thank you at.
At this time, we've reached the end of our question and answer session I will turn the floor back to Mr. Monahan for closing remarks.
Thank you that wraps up our third quarter Conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation in our best wishes for the rest of the day.
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