Q2 2019 Earnings Call
Greetings and welcome to the Ecolab second quarter 2019 earnings release.
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A question answer session will follow the formal presentation.
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It's now my pleasure to introduce your host Mike Monahan Senior Vice President external relations.
Mr. Monahan you may now begin.
Thank you Hello, everyone and welcome to Ecolab second quarter Conference call with me today is Doug Baker, Ecolabs, Chairman and CEO and Dan Schmechel our CFO .
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 <unk> Dot Com slash investor.
Please take a moment to read the cautionary statements on these materials, stating that this teleconference and the associated supplemental materials include estimates of future performance. These are forward looking statements and actual results could differ materially from those projected factors that could cause actual results to differ are discussed under 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 of the results continued good sales growth and strong margin expansion drove ecolab double digit earnings per share growth in the second quarter pricing, new business gains and product innovation led the sales and operating income growth, which along with.
Cost efficiency actions yielded the second quarter's 12% adjusted diluted earnings per share increased.
Moving to some highlights from the quarter and as discussed in our press release acquisition adjusted fixed currency sales increased 4% as the industrial and other segments. Both showed strong sales gains we realized improved growth from the institutional segment and a modest gain from energy.
Adjusted fixed currency operating income margins increased 120 basis points continuing the good acceleration shown throughout 2018 and into 2018.
Growth was led by double digit gains in the industrial and other segments.
Adjusted earnings per share increased 12% to $1.42, representing another quarter of double digit adjusted EPS growth.
Currency translation was an unfavorable nickel per share in the quarter.
Progress continues on the spin off of our upstream energy business. We continue to expect to spin off to be completed by mid 2020.
We continue to work aggressively to drive our growth winning new business through our innovative new products in sales and service expertise as well as driving pricing productivity and cost efficiencies to grow our top and bottom lines at improved rates across all of our segments.
Our digital investments are developing well and we look for them to add an expanding range of new actionable insights for customers to improve their operations enhance their experience working with us and increase our sales force effectiveness.
We continue to expect consolidated 2019, adjusted diluted earnings per share to rise, 10% to 14% to the $5 to 80 cents to $6 range as volume and price gains and cost efficiency benefits more than offset the impact of moderated delivered product cost increases and business investments.
Currency translation is expected to be an unfavorable 11 cents per share in 2019.
Third quarter adjusted diluted earnings per share are expected to be in the dollar 65 to $1.75 range of 8% to 14%.
In summary, we expect continued good top line momentum in 2019, which should more than offset moderated delivered product costs and unfavorable currency exchange and along with cost efficiency actions yield 10% to 14% adjusted diluted earnings per share growth.
We continue to make the right investments in the key areas for differentiation, including product innovation and digital investments to develop superior growth this year and for the future.
And now here's Doug Baker with some comments.
Thanks, Mike and Hello.
Well it was a very solid quarter, adjusted EPS up 12% versus year ago.
We had a number of standout performances led by water at 8% organic life Sciences, which was up 43%, but importantly, 14% organic.
FNB up 9%, 5% organic in past, 7% organic.
And we also saw solid improvement or institutional and health care businesses.
So continued strong pricing work new business efforts led by innovation all helped drive a 14% improvement in operating income, which reflects the 120 basis point improvement in ROI ratio what picks currency.
So this is deliberate importantly, while executing the key final steps in our U.S.S.A.P. rollout, which is now largely behind us.
So as we sit here today, we feel we're in a very good position, we've got significant growth opportunities. Our teams are focused on driving new business and having success margins are expanding via pricing and cost saving efforts and all of our initiatives have legs. There early so as a result, I remain quite confident we'll meet our dual objectives of delivering the year and importantly, exiting with great momentum so with that I'll turn it back to Mike.
Thanks, Doug that concludes our formal remarks as a final note before before we start queuing day, we plan to hold our 2019 Investor day on Thursday September five if you have any questions. Please contact my office operator would you. Please begin the question and answer period.
Yes. Thank you.
I will now be conducting a question and answer session.
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Wonderful please while we poll for questions.
Thank you.
Our first question is from the line of Dan Dolev with Nomura. Please proceed with your question.
Hey, guys. Thank you so much for taking my question.
So.
Looks like a great quarter.
When it comes to the cost control et cetera.
It looks like you're guiding your gross margin by 50 basis points for the year.
Two questions you're a how much confidence do you have in that.
Increasing the guide Doug and the second question is if I think about sort of the EPS impact.
For this it's north of I think 10 cents potentially they do have some interest savings may be little bit more shares like why why not take up the EPS guidance I mean that seems quite conservative. Thank you.
Well I guess from the the first question on gross margin.
Good about our ability to continue to drive improvement in gross margin Q2, you'll report it had a negative year on year, our gross margin not significant but that was really driven fundamentally by the fact that we just produced less than that quarter.
And that was taking down inventories as we had a successful S&P roll out we built them into first quarter and we actually in Q4, and so we really reduced inventories fairly dramatically four days in Q2 versus Q1, and we also had lower sales in our welkin business and so that's really the sum total of why you Didnt see a little daylight between gross margin this year versus last year.
So we see raws holding getting marginally better pricing continued so we have a good deal of confidence that we will see improvement for the year in gross margin estimating call around 50 basis points plus minus for the year.
Your question is too.
You know what Weve got pluses and minuses in the year. We always do you identified a couple interest income is is a plus versus what we expected raw materials or a minus plus as we sit here today of course that can change, but as we look what will be a minor plus versus our plan, but then you've got volume negative really just in the upstream business and really principally and welcome.
And so thats the negative they sort of neutralize each other.
There are certainly some of the margin increase is just a function of.
Little lower sales as a consequence, a welcome volume coming down which by itself is a lower margin too.
So I think we feel we have a very balanced outlook, we're continuing very significant investments in the business.
We are undertaking in finalizing Sep the high risk stuff is all behind US 100% of the U.S. supply chain is on it now well that the key parts.
And so we feel like we're in very good shape in a number of areas and we're forecasting midpoint like a 12%. So you know it's a it's a good year and importantly, we feel will have very good momentum exiting the year.
Great excellent results. Thanks again.
Thank you. Our next question is from the line of Gary Bisbee with Bank of America. Please proceed with your question.
Hey, guys good afternoon.
Doug as we exited last year. The sales momentum is built and I think the expectation was that that momentum would continue.
Things have slowed a bit.
Year to date I realize energy is a big component of that and I guess, just certain institutional you've walked away from some low margin business, but yes.
How are you thinking about sales momentum overall and.
This four or 5%.
Hi type a number the last two quarters is that.
Pretty good number to think about going forward or is there a case that there could be some acceleration from here.
In the back half of the year. Thanks.
Well I think you touched on the two issues I mean, one is upstream sales are softer than expected and softer than last year.
Yeah on institutional losses.
If you exclude the upstream business, we have 6% sales 5% organic.
And that would include the institutional.
Losses. This year, so I think underneath we feel good I mean, we were growing organically in a water at 8% I highlighted a number of standout divisions.
Yeah, and I think you know, there's five organic would easily be six with a normalized losses in institutional which we will see.
Beginning first quarter of next year. So I think we're in good shape. There we continue to drive pricing at the same time and manage a number of other initiatives I don't think there's ever any satisfaction here with whatever the print is on our sales number we always want another point or another do but I don't believe that's an issue at this point in time and importantly than the net new business results are accelerating particularly in institutional which is the best leading indicator we have a future results.
Great. Thanks, and then just a quick follow up by any any how are you seeing the macro thinking about the macro these days a lot of headlines about slowing in China, Obviously Europe remains.
It's relatively weak is that having much impact on on the trending in revenue or.
Not change that much from your vantage point. Thank you.
Yes, I agree with the headlines I mean, we see some of that in China too, but for the year were estimating mid to upper single digit growth in China.
And China is.
Size, it's half a billion dollars. So it's not going to have a huge seesaw effect on our overall results I don't think the economy is hitting our results right now theres significant share in front of us.
We can continue to drive it there are economic conditions, obviously that can impact us were not bulletproof, but we tend to perform better than most and poor economic times, but at this point in time I wouldn't blame the economy I think all in all we are doing what we need to do to continue to push sales and push pricing and the other things forward and I think the environment is favorable enough to allow us to do that.
Great. Thank you.
The next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.
Mr. Already your line is open for questions.
Sorry about that good afternoon, Doug.
You know the performance of your water business has been.
Outstanding over the last call it four quarters or a little more maybe I know the strong organic growth is a combination of many different factors, but in terms of share gains. If you look at the light business on the heavy business you look at the different geographies can you talk a little bit about where your product innovation is really having an impact with respect to new business wins et cetera.
Yeah, there have been a number of areas. Obviously as you just highlighted I mean, the water business is strong across many fronts, which is one of the secrets. Its particular strength recently is an initiative that we had really coupling what I would call our food safety hygiene business with water, particularly in the food and beverage area. We've had a number of just huge wins in that area. Because there is real synergy when you combine the two we have a unique ability to do and deliver value in that way versus competition. So we have significant competitive advantage I believe we can bring outsized value to customers that others can't and as a result, we've seen dramatic share wins there, but this isn't the only area that we can do that we're now taking it into some core parts of the institutional arena, where we also believe the combination can have significant impact as well.
We move forward, but the fundamental business.
How theyre executing how we're looking at leveraging Threed TRASAR, how weve digitize much of the business and give us much more visibility gives us much more visibility and in turn allows us to do much more for customers. All these things are helping drive share gains.
Okay. That's helpful. Thanks, and then my second question on your digital business. You know are there any quantifiable metrics that you could share with us with respect to your digital innovation efforts can you give us a better idea how the programs moving along maybe in.
In terms of the number of users today are pilot programs in the field are data scientist on staffing or anything you can point to to say hey.
We're in a different place than we were two years ago.
Well, we certainly are I would say you know a couple of years ago. I mean, we probably tripled sales that we call digitally enabled over the last couple of years, we've had a bunch of sizable wins this year as the technology and the investments that we've been making over the last few years are now bearing fruit because they're marketable if you will.
Well, we will do is spend real time in the Investor day meeting that we have coming up in September quantifying in discussing this in more detail that will obviously be webcast. So even those who can't make it in person can certainly here and we are working in developing we have a number of internal metrics that we've been refining what we wanted to do is make sure. We have the right metrics to point, our investors to I.E. The ones that we think are best indications of leading wins in leading results and so we've been doing a lot of work there. So certainly its digitally enabled sales.
It is a number of people on hampered us number of units that were touching type of information there were pulling et cetera. All those things are moving in the right direction, we feel good about the effort, but this is a.
Area, where you can't move fast enough.
And I think the more we learn the more we know we have to learn and also the better we feel about the upside potential. There is technology represents for our ability to make a difference with our customers. So it's all good but we're going to do it's been some real time on it and not in September .
Got it thank you.
Our next question is from the line of Manav Patnaik with Barclays. Please proceed with your question.
Thank you good afternoon that you know everything.
Right.
You know I think gives you confidence that.
The macro environment and evidently but no impact in India can you can Tim but I guess, you know a couple of years ago and.
Wasn't that one could dream.
Top line wasn't and I say that something I guess.
The changes made over that period of time today to thanks.
On said that you'd probably be able to outpace that sales pipeline that we executed last two years.
Yeah, I mean, the only safe answer is look I think we've done a number of things to further strengthen <unk> competitive advantage. The digital conversation are we just.
Talked in that area is certainly one of the areas with that said and I mentioned this were not bulletproof. So yes, the economy drops dramatically, it's going to impact us, but I don't believe it pulls us negative and rarely has it even if you go back to the Oh eight or nine episodes.
We kept our nose above water, albeit barely.
During that period of time, so we do a good job during the downturn is a lot of it is the nature of what we sell how we go to market. The trade we asked from customers I.E. invest in our technology and you're going to get two and three X. Bakken returns is a very effective story, even in difficult times. So I don't want to say that it's not going to have any impact that's not our history, but I think it's a muted impact versus other companies.
Okay got it Thats fair and then just on.
Margin side, and then on the guidance implies that second half, Mike and grant and if and how it's very good.
Assuming raw material cost thing check or as expected should we expect.
Next you have kind of a similar showing on them I can say to it than that.
We should be considering.
You always get a little wary of talking about the next year or so early in this year.
But I guess, what we've alluded to once we introduce the accelerating cost savings initiative there are conversations.
If you read back I mean, we did indicate if we normally run a call. It a 40 to 50 basis point improvement accelerate should be additive to that we acknowledge that this year, we would expect or why margins to create over 100 basis points you all things being equal I don't I don't think it's a one year phenomenon, but there's a lot that I don't know about next year I see FX raw materials economic environment et cetera, So I am a little wary of coming out too strongly on that but what we're working hard to do is set up the scenario, where thats. The type of capability. We have from a delivery standpoint, I you when I referenced in my upfront comments, leaving the year with momentum we want both topline and margin momentum as we leave the year. Because then you have a lot of tools.
To to deal with whatever the environment is going to be.
Got it all right. Thanks again.
Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Good afternoon.
I guess two questions one could you give us a what the.
Sort of longer term run rate and then the recent growth rates in the <unk>.
In the Remainco energy the piece that you are keeping.
So we can think about what a benchmark has for the next few years.
And secondly.
From from where you sit now.
Is there a way to.
Leverage the digital platforms into health care to accelerate the business there or.
How has your thinking evolved around the need for scale in that business to improve the topline growth.
Yes, so I'll just touch on health care first health care teams been one of our leaders in.
In digital innovation in their business.
And.
Already has significant sales we have a really I think the best in class hand hygiene system monitoring system for acute care.
Adoption rate continues to pick up and move forward. There, we've got great technology, and monitoring and measuring our ability to knock down health healthcare acquired infections, which is a big an important measurement. So there are a number of areas, where there's been real innovation and I think the team as they become more aware of capabilities are starting to drive this to other parts of the program. So our health care business in the quarter was for 3% organic.
It was 6% organic in Europe .
And double digit in other regions North America us in particular was flat, but I think what the team's doing well is there identifying where they have really strong growth opportunities medium and long term and they're increasing their focus on those areas and getting after him and that includes some of the digital efforts that I spoke to.
The other.
Question, you had around downstream. So there are three components to our energy business today.
Theres oilfield chemicals Theres welcome those to comprise upstream that's it's being spawned.
And downstream is remaining with the company and being folded into the industrial.
Businesses, it will be still a standalone business, but it will report up into the industrial group. The downstream business is about a billion dollars in size.
It grew last year at mid single digits. It grew same same in Q2.
It's expanding margins this year around 200% as its pricing is catching up to raw materials. This year as well, it's a well above average in terms of all why margin for the corporation a great return on capital. It's a very similar business to our other industrial businesses. The mid single digit is sort of what we expect out of that business. When we're executing well and we've got an advantage technology. There we have a leading share and we continue to gain share in the market with that business.
Thank you.
Our next question is coming from the line of John Roberts with UBS. Please proceed with your question.
Thank you and nice quarter.
Is it fair to think about the test business pest elimination is a leading indicator for the institutional segment in that test is a little bit more discretionary. So the fact that it's performing so strong for so long.
Argus well for the momentum in the institutional business.
I you know I would say.
The Pes business.
Look it's the largest component would be in institutional, but it's got a fairly sizable share and industrial too.
You know what's similar about the two businesses is execution matters quite a bit and what the pest team has really done over the last call at five six years is stepped up their execution considerably. We went through a few years you may recall, where it was low single digits. You know everybody who is kind of what's wrong with past, we put it into the shop. It came out and it's really done incredibly well growing at high single digit organic growth rates for really several years now in a row.
I don't know, what if it's a perfect proxy or not.
I would say our institutional business.
Why I am not worried about it from a long term standpoint, do I wish it was growing faster this year, yes.
That would align me with every member of the institutional team with that said.
I think they're doing exactly what they need to do there driving sales driving innovation and driving execution, particularly in Europe . We are seeing positive signs net business is up double digit in institutional.
And the answer the innovation focus and the execution focus is starting to show results in Europe , albeit slowly, but we expect Europe to improve towards the second largest institutional business. We have in the world we need to get that thing moving.
We still have such significant upside in this business.
It can be product penetration and the more developed markets, we have new water opportunities this business, which I alluded to but also ones that don't really involved in alco water per se, but are significant we think upside potential for the business. We have sizable share an execution opportunities globally. So we look at this and we've talked about being on track to exit the year I'll remind everybody I mean like on 12 31, I believe we're going to be at a 4% to 5% run rate in that business as a new business continues to kick in and most importantly, as a loss businesses lapped and all the fundamentals point to that direction. So we're just asking the team to keep doing what they're doing we believe time heals. This thing and that we're going to be in very good shape.
Moving into 2020.
And then secondly at the National Restaurant Association meeting Youve previewed a lot of digital activities over in the institutional segment is the industrial segment as rich in digital opportunities and obviously the Ana ratio is focused towards the institutional markets. We didn't talk about industrial there but.
I don't know if you can give us a perception of how balanced the digital effort is across the two.
Yeah, I'd say, if anything the institutional side has been playing catch up to the industrial side. We started a lot of this work and nalco water in particular part because we had a head start with the acquired technology trace Threed TRASAR, which was connected to our.
System, Assurant Center, and Pony, India, but as we continue to develop that technology develop our capabilities that was the first place that we really kind of use that as a tip of the spear for digital innovation, because we add knowledge. There that we should go leverage we've taken a lot of the learnings there and that's really the base of knowledge that we're applying in other businesses and then obviously customizing it for the challenges at hand, so if anything and I think you'll see that clearly in September we have huge significant innovations there many of which are being commercialized right now that were quite quite excited about just like we do on the institutional side.
Okay. Thank you.
Our next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you.
Doug just on pricing given some raws now flattening out coming down is there some.
Potential for your pricing to also decelerate in the back half of the year.
We don't expect it to decelerate in the back half of this year.
Obviously, if you get.
Significant raw material give ops. It does have an impact on our ability to get pricing. We don't typically go negative on pricing as you've watched over the years and we don't expect to in the future but for this year, we expect to have strong pricing throughout the balance of the year.
Very good and just on the S&P implementation done what do you expect tailwinds to to be for you guys from that.
Fully in place now.
Well and as I said and I you know, we've got still some work to be done in a couple of divisions to bring on but the big divisions and the big risk is really what I would consider behind us not in front of us and we didn't.
This is kind of the most mentioned we've added a quarter, mostly because we don't have any negative to tell you.
And we're largely done.
Hi look there's a number of things when you go through this.
One we know we had increased cost during implementation. Some of these are starting to come out but there is more that we've got to go get out you have to shift production you have to build inventory you have a lot more intercompany freight than you do when you're not doing this you have extra shipments because your service levels are naturally impacted as a consequence of this significant shift.
Our product supply team I thought did a heck of a job managing through this but you can't say it didn't have any negative consequence, as we know it did so we know we're going to see some margin come back as we go through this but most importantly, it's a visibility that it gives us going forward I mean, the reason to make this investment isn't just defense. It's also offense. So our ability to look at our business understand trends do a better job managing things like freight things like customer delivery do a better job delivering and do it at less money all of which is even more important today given the escalation in freight pricing that we've seen the last few years I think it's going to have a number of benefits as we go forward now of course, we build that into our forecast, but it's these kind of cost savings opportunities that we want to continue to build because these are the leverage that we want to have to manage through whatever 2020 throws our way because it's similar environment as this year.
So were in perfect shape, if it's even worse, we're in good or decent shape and thats. The type of situation, we try to put ourselves in.
Thank you very much.
The next question is from the line of Vincent Andrews with Morgan Stanley . Please proceed with your question.
Thank you very much.
Doug just if I could ask you a little more detail on institutional.
Last quarter, we talked about there was some customer inventory issues that you thought would.
Reset over to Q in Threeq, you couldn't exactly tell the timing. So if you could just update us on where we stand on that it would be great.
Yeah, we got some of that back in the second quarter, we would expect some more coming back in the third and fourth.
But I expect this business really to kind of bounce around you know this 3%.
You know level for the balance of the year, it's a little better than that if you if you adjust for losses and stuff like that but at that level. It is very easy for us to get to the four to five exit rate that I've talked about so that that's what we see in some of that is inventory.
So naturally coming back as it does.
Okay that actually gets me Jim a question for Dan, which is just looking at the cash flow from operations for the first six months year over year.
It's up quite nicely ahead of the net income gains so and there were some conversation about the inventory builds around Sep and so forth. Maybe you can just give us a sense of how working capital should trend.
In the back half of the year, how we should be thinking about overall free cash flow for the year.
Yes sure. Thank you so you're right when we when we were on the first quarter call right taking questions about what was a relatively weak at least year on year cash flow performance clearly that slipped into the second quarter as we expected it to and communicated that it would and year on year, a big part of that is improvement in working capital trends in inventory in particular, if you look at the second quarter last year as Doug indicated we were really building inventories in anticipation, but also sort of a security for the S&P go lives clearly, we flipped that and in year on year comparison inventories is significantly favorable to cash flow as in fairness is accounts receivable and a P and so it was all in all a very strong quarter for cash flow. If you look over the full year I guess I would continue to to say what I said last time, which is we will there continue to be opportunities to improve working capital performance.
Somewhat so we expect inventory balances to come down, but if you drop all the way down to year to date free cash flow the metric that I focus on is where you started which is we expect to be delivering very strong free cash flow something like 90% conversion of net income and that will be dependent of course in on.
Other activities that we take but that's the number that I would focus on for the full year. So great quarter feel good about our position to deliver strong free cash flow for the full year in line with business results. Okay.
Thank you very much.
The next question is from the line of Jessica It's with JP Morgan. Please proceed with your question.
Thanks very much.
On your consolidated income statement your product and equipment sales were up 1% year over year and your service and lease sales were up six.
Why was product and equipment, so slow and service and lease on growing so quickly.
Yes, the product was really a consequence, a well count because welcome doesn't really have service component per se and so as a consequence, when it's down it as an outsize impact on that product component.
I will also say and I'll, probably get kicked by my CFO and others.
We're not big fans of this product service split internally, we we manage and look at the business in different ways. Because we don't believe its the best indicator now Dan didn't create as you will also remind me.
It was foisted upon us, but but we don't believe its the best way to go walk, but the issue you're talking about is really driven by well Kim volume being down which distorts the picture.
It. It's also the case that the margins in service and lease.
Listed 240 basis points and product and equipment cost us.
And the property and equipment.
Peace maybe dropped 120.
Can you talk about the margin differential wise.
One was slower and the other one was higher.
Yeah, well the product is back to the earlier conversation, which is manufacturing so we made less product in the quarter.
So absorption was a negative.
As we took down inventories, where only four days from Q1 to Q2 and welcome was down so you add those double impact on absorption it was.
The single biggest issue raws were about what we expected pricing was what we expected et cetera.
The service component one we've got initiatives it gets a little outsized in terms of what the actual impact was in service I would say.
As we look at it we don't believe it best illustrates what's going on in the business.
And when we look at it we would say overall gross profit combined was if you take out the inventory move was flat year on year, roughly and we add improvement and SGN a across the board GMI and Das and we don't price. This stuff separately, we do bundled pricing. So separating these things is a bit of an artificial game for us.
Okay, great. Thank you so much.
Our next question is from the line of Christopher Parkinson with Credit Suisse. Please proceed with your questions. Thank you.
When you break down your industrial business by platform, so commercial off of the utility chemical et cetera.
And you just look at all of your longer term opportunities on a global basis as well as the relative end market growth rates pricing power capabilities can you just comment broadly on the longer term margin drivers in terms of mix your expectations, just any sense, we could get to.
On where this business could go over the long term would be appreciated. Thank you.
Well I'd see water across the board, we're while we say we're the market leader, it's a very similar story to the balance we're still relatively low and share.
And the wind if you will or the occurrence in the water area are very favorable.
They're not favorable for the world, but there are favorable for those with technology like ours I easy water pressures are going to increase we know water scarcity is only going to worsen something like 70% of the worlds GDP is going to be in water scarce areas. As soon as 2030, there's going be a 40% mismatch between freshwater supply and demand as a consequence of growing middle class and finite water supply.
So all those things lead favorable macro environment and then we sit here with what we consider best in class technology and capability, helping our customers reduce water consumption dramatically. This in turn reduces their carbon footprint and energy Bill. So they end up saving money at the same time, they end up saving water water itself is too cheap, but 'cause it it starts saving energy do you end up with significant savings.
This is true in virtually every industry that we are every vertical as you discussed we compete in and so as a consequence, we feel very good about our positioning in water and our ability to continue to execute digital will give us more capabilities in terms of shining a light on the difference that we can make enabling customers to see where they stand in a given industry and what their opportunities are and what types of investments could be made to get what types of returns. All of these things. We think long term are favorable to us and then it's incumbent on us to execute.
And Thats really what we believe the name of the game here is in water. We we bought it because we thought it was going to be an important issue for our customers. We knew it already was and all we've done since his learn that it's even more important than we probably felt and the leading technology and I would say coupling of ecolab know how its been a very potent mix.
Great. Thank you and just as a quick follow up on the enterprise selling initiatives. Obviously this has been going on for some time can you just do a self report card and how you think you've done the ongoing opportunities as as well as the opportunity still to come.
It's clearly been successful in SMB, certainly recently, but what are the areas institutional pest elimination in specialty do you still see the largest opportunities. Thank you.
Yes at the time of the merger and I'm going back in my memory is not flawless, but I believe we said that we were chasing a half a billion in terms of synergy sales and we've more than delivered against that objective and I would say if anything what we've learned across the way is how how many and how significant the opportunities are.
The next chapter here is continuing what I would call development synergistic development I see where one innovation on lets say FNB and another innovation on the water side when coupled together bring even more outsize advantage for customers who choose to buy both from US we have the same opportunity in institutional in a number of market segments as well and as we crack that code. We believe we're going to have even more success going forward.
But it's still early I would say you know look we chase a 120 billion dollar market opportunity conservatively and were 14 15 billion.
In water is the single largest opportunity of all.
And so we are not sitting here worried about running out of green space in terms of the ability to go generate new business, it's really making sure that we execute and do it well so that we capture.
Thank you.
The next question is from the line of Rosemarie Morbelli with Gabelli and company. Please proceed with your question.
Thank you good afternoon, everyone.
Hi, congratulations on this term quota.
Looking at.
At the SMB Dag <unk> the industry was flat with SAP and yet you reported just strong flows excluding acquisitions Cup plates that accounts share gains price et cetera can you talk about in more details. The trends you are seeing in the different too.
Said segments like dairy beverage early food.
Yeah, I would say you know overall whats happening RF and be business.
Is one we're gaining share and we've had outsized share gains, particularly in the beverage and brewing parts of the business over recent trends and so those have been probably the most importantly fastest growth segment or beverage brewery.
Food is about on par, 4% et cetera, but there is also quite strong at 10% and it's not exactly an ideal market for for dairy. So what we're doing is helping customers produce more with less less water and less energy. This brings outsize savings to them and when they're in a flat market savings are very important and they get to do this without any sacrifice I eat food safety measurements I'd say operational efficiency measurements, all are equal or better under these scenarios and you get the resulting savings in water and energy and also a storyline around sustainability because it's real so it's that formula that the team has developed in partnership in concert with Nalco water team and that's what's leading to our ability to drive success in a relatively flat business.
Oh, Thanks that is helpful and I was wondering looking at beverage.
I mean, there is a lot of noise around plastic bottles and they seem to be an increase in the use of signs of minimum Ken. This is plastic bottles sets for waters and all that.
Other soft drinks or how do you fit in that particular category are you going to be heard Jeff if sleep.
The industry moves to substantially more in Kansas is plastic bottles.
No I'd say first our position is less all collectively do what smart for Earth.
And we'll all have to adjust our business with that said.
A trade in plastic bottle to either milk type cartons, and or aluminum cans will not have a negative impact on our business.
In those categories.
Yeah.
Okay. Thank you.
Our next question is from the line of Mike Harrison with Seaport Global. Please proceed with your question.
Hi, good afternoon.
Was wondering within the water business, you mentioned, some new business wins in mining.
Just wondering if these are new mines and the fills associated with the new mines.
Where are you taking share at existing mines, I guess I was under the impression that it's typically difficult.
To take share from existing mines tend to be pretty sticky business.
Yes look there's two things going on in mining, but the biggest as a mining rebound broadly.
Right, it's a cyclical industry, but we've also had some success with new business and mining.
Mike in.
We're targeting and trying to move increasingly away from coal, which you might find obvious into areas like phosphates and the others. These strategies are working and so some of it just reflects moves that we're taking to better position the business long term.
Alright, and then I'm wondering also ask about the health care business can you talk about what profitability looks like in that business and maybe how that has been.
Changing or evolving over time.
Health care, we would expect.
Why for the year to be roughly flat.
But it really reflects you know.
Decisions to invest in the business.
The Omnisource acquisition that we made a couple of years ago in France, which really gave us even stronger beachhead in Europe , but most importantly, an avenue in a number of other markets around the world has proven to be a great acquisition and so we continue to invest in real strong growth opportunities and we're happy to do that in Europe as I mentioned earlier, we're seeing 6% organic growth and the health care business and will feed that.
Hi, Thanks very much.
Our next question comes from the line of PJ Juvekar with Citi. Please proceed with your question.
Hi, Doug This is Eric Petrie on for PJ.
Historically, food and beverage and water.
Growth rates are.
You know in the mid single digits, but now it's your digital investments and market share gains do you see this upper single digit sustainable into 2020.
Well you know I.
Look we are working hard.
To always increase what we'll consider normal and I think there is a lot of legs I mean waters got quite a bit of momentum we've got good momentum and FNB.
We don't see anything sitting here today, that's going to make us change our view that that's what we should be growing that's the rate we should be growing the business. I also don't know what 2020 is going to bring us. So I don't want to sit here and commit to 8% on water organically as our terminal value.
With that said, there's significant upside in that business, we got a great team great technology and they are executing well so I would expect that growth rate to be above the average for the company.
Okay. Secondly, I wanted to ask about your M&A pipeline and what you're seeing in terms of valuations.
And does show our guidance EPS guidance of 10% to 14% include any bolt on deals in the second half.
[laughter], Yeah I look at it. It does include any bolt ons, obviously anything that probably comes on the remainder of this year as is likely to be dilutive is it is accretive just because there's not much time left in the year, but that doesn't stop us from doing the deals we really look and focus on do we believe we're going to get a good return for shareholders out of a deal not immediate accretion dilution, but all of them would be incorporated in our forecast already our pipeline is large and I would say so our multiples.
And.
So as a consequence, you know we're going to remain disciplined we are doing deals we are buying companies, where even with the price is higher than we might like we know we have such significant upside that we can turn it into a very good return deal for our shareholders and we'll continue to do that but we're going to exercise discipline as you would expect us to.
Great. Thank you.
The next question is from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.
Great. Thanks for taking my question I guess I just wanted to dig into the margin profile a little bit more by looking at what seems to be the two biggest factors, which our raw material costs as well as the cost savings program that you guys have been undergoing here and hoping that you could quantify the increase year over year in raw materials that you saw as well as the amount of cost savings that you recognized in the quarter or maybe the exit of the annualized exit rate. Just so we can get a sense of what's driving your very good margin improvement in the quarter.
Yes.
No for cost savings it was a little over $20 million year on year in terms of.
What it what it delivered in the quarter.
In terms of raw materials are fairly benign in Q2.
Following a fairly hefty bill in Q1.
Let me just get to that so I'll give you the wrong number.
You know.
Yes, raw materials were just up modestly and in Q2, and we expect them to be.
Below next year are below last year in the second half.
So.
But it wasn't a material impact on Q2, one way or another it just wasn't positive or a significant negative.
Great. Thank you for the color that's all I had.
Thank you at this time I'll turn the floor back over to Mike Monahan for closing remarks.
Thank you that wraps up our second quarter conference call. This call is associated discussion slides will be available for replay on our website.
Thanks for your time today in participation and best wishes for the rest of the day.
Ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.