Ecolab Inc (ECL) — Q1 2019 Earnings Call Transcript

Thanks, Mike, and hello. So a quick overview: we had a very solid start to the year and are in a good position to deliver 2019. On the plus side, industrial sales were very strong, and so were margins as pricing is overcoming inflationary pressures that we have been feeling, leading to margin recovery. Energy also had strong margin recovery even with predicted soft sales of -2%. Our other segments, our other specialty businesses QSR and FRS were strong also. The only disappointing news is institutional whose sales were weaker than expected. The underlying sales were 4% U.S. and 3% globally. This is better clearly than the 1% reported but still off expectations by a point or so as distribution inventories were reduced; it happens frequently, and the exited business we discussed last quarter converted quicker than we had forecast. We expect the institutional business to show improvement and reported underlying sales through the year, particularly in the second half. So, as we finished the first quarter and move into the balance of the year, we are well positioned we believe. The heaviest lifting of our U.S. SAP implementation is behind us with our fourth and final supply chain wave completed in the first quarter of '19. Our pricing, cost savings, innovation, digital, and talent initiatives are all on track. New business is tracking ahead of last year's record pace. As a result, we expect to deliver double-digit adjusted EPS for the year, ending every quarter and most importantly leave the year with good momentum as well. So with that, I am going to turn it back to Mike who will open up Q&A.

That concludes our formal remarks. As a final note before we start Q&A, we plan to hold our annual tour of our booth at the National Restaurant Association Show in Chicago on Monday, May 20. Looking further ahead, we also plan to hold our 2019 Investor Day on Thursday, September 5. If you have any questions, please contact our office. Operator, would you please begin the question-and-answer period?

Hi, this is David Ridley-Lane filling in for Gary Bisbee. Can you discuss the revenue trends in Europe, particularly in your core segments, institutional and industrial?

We experienced a strong quarter in industrial and institutional segments. Industrial saw organic growth of 5%, while institutional dropped by one percentage point. Quick Service Restaurants performed fairly well, which, when combined with the other segments, results in a more favorable overall picture. In Europe, we believe we are making the right moves to enhance our institutional performance. Late last year, we appointed a new General Manager, Martin, who previously succeeded in turning around Pest North America. We have also introduced a sales field leadership role in Europe reporting to Martin. This team is focusing on three main objectives: localizing innovation, as we had become too global in our institutional strategies, enhancing field execution discipline, which is crucial for the sales leadership role, and bolstering our sales capacity by reallocating some field resources that we have in excess to support corporate account selling. While this doesn't mean the same individuals will always be in these roles, it does involve reassigning the same budget resources.

As a quick follow-up, I heard your comments on new business growth. Could you provide some quantification or context regarding your hiring, specifically the average hiring in the sales force? Additionally, are you seeing increased productivity from the sales team as a result of hiring more people? Thank you.

Yes, over 2018, we added about 3% in sales and service resources last year. So, we feel we are in a good position to take care of the growth that we are generating as we move forward.

Thanks, wondering if you could touch on Life Sciences as it continued to outperform the market very nicely there, Doug, maybe talk a bit about the runway for growth. Any changes you are seeing in the competition there?

Yes. No, the Life Sciences business continues to do well. And while it was performing decently before we, if you will, created a focused Life Sciences business, it clearly has kicked into a higher gear. And we've averaged double digits since that point in time. Look, we love that market. So the market is global. It's consolidated many cents. If you think about the customer set, fairly fragmented competitive set. That's a good environment for us. We continue to reach out and drive our advantage which I would say is kind of three fronts. We have very good clean room technology. We have world-class CIP technology, so the lessons that we have learned over the years in food & beverage and increasingly in other industrial applications perfectly apply here. And then, finally, the water capabilities that we have are really well-suited for this industry as well because it's a prime source for contamination potentially, etc. And so, we are leveraging these advantages quite successfully growing that business. We made an acquisition, as you will recall in the U.K., Bioquell just closed in the fourth quarter. And so that's going to give us additional technology and a new entry point, if you will, into this market. Finally, we just added manufacturing capability in North America where we have now registered products. So, it's going to open up a much broader swath of the U.S. market. And we have been able to compete against previously. That will, in essence, change the competitive environment for us, I don't think for the worse simply because we will be able to go after bigger parts of the market.

Got it. That's helpful. And just a follow-up, in terms of you mentioned the U.K. acquisition, is there a pipeline of potential targets in that space?

Absolutely. And I would say it's relatively new space for us. And so it's not an area that we have probably mined as heavily as we have others in the past. So, yes, there is a nice long list. Obviously, it's going to be at the right time, right price, etc.

Thank you. Good afternoon, Doug. Regarding the Institutional side, you mentioned the distribution inventory issue. Could you elaborate on that and perhaps provide examples from past quarters where it may have occurred so we can review? Additionally, was that the primary reason for falling a point or two short of your expectations?

Yes, it was indeed one of the issues we faced. Distributor inventories fluctuate, and we have data from the distributors that help us track every case. This gives us a clear understanding of consumption in the industry, allowing us to easily assess the changes in distributor inventories based on what comes in and out. This situation arises almost every year during a particular quarter when we have discussions about inventory. Last year, for instance, our conversation in the first quarter was quite different, as distributors had increased their inventories, which made the reported numbers seem stronger than the actual sales at that time. We didn't anticipate that trend continuing into the second quarter, but we expect to end the year with a 5% run rate. If I were to summarize the institutional side, it's important to note that we anticipated a decline in Q1, mainly due to the low-margin business we had previously announced. However, the situation was worse than we had expected, as I noted earlier and Mike mentioned as well. The low-margin business exited the market more quickly than we had forecasted, but this timing issue won't have any long-term effects. Distributors did reduce their inventory during the quarter, which is a common occurrence, and we anticipate a rebalancing in subsequent quarters, although I can't say for certain whether that will be in Q2 or Q3. Lastly, regarding the SAP U.S. implementation, I would describe it as a "fog of war" scenario. This does not mean we lost consumption due to SAP; that was not the case. However, with the implementation process, which occurred in four waves a few months ago, we preloaded inventory with our direct customers and in trade to safeguard against potential supply chain disruptions during the transition. We did not experience any shortages, as we managed to get up and running smoothly in each wave. Nonetheless, this preparation led to significant rebalancing afterward, making it challenging to clearly assess the situation in the short term.

That's super helpful with the color. Maybe just along the same lines on industrial, like, should we think of that 7% growth as sustainable or maybe there's some timing in it, might sort of stabilize later?

Yes, look, our industrial business is really led by water and F&B have obviously been strengthening sequentially for a number of quarters. It's driven by both pricing activity and by volume, volume driven by a lot of new business which we've been talking about right in almost every call how we have had very good new business success. That's clearly in the water and F&B business, in particular, also in institutional, etc. The food and beverage rate, organic growth rate is 7%. I wouldn't say that's our terminal value, but F&B has really done a heck of a job partnering with water to bring outsized value to customers, and this turned into big sales with big players. Now, annualize again some of these sales in a quarter, so every quarter is not going to be a seven organic. But with that said, we expect to have a very strong year in F&B and a very strong year in water. So it's exactly sustainable. I'm not going to commit that to every quarter, but we expect mid to high single-digit organic growth rates in these businesses, and we also are starting to see the margin leverage that we've talked about, we had significant raw material and logistic inflation impacting all of our businesses but in particular our industrial businesses. And so, they've been on pricing, and this pricing is now starting to overwhelm the inflation in that business, and we're starting to recoup the margin losses that we've seen. But this isn't going to be overnight either. Right, this is going to take us some time to rebuild these margins, but you should expect to see positive margin build throughout this year, and it's going to need to continue into next year. So, some of that's going to come from pricing, some from cost savings, some from doing a better job operating supply chain now that over 80% of our volume is on SAP. So we just have better visibility and a better and a more easier, if you will, kind of foundation to run on. So those are the key things to look for and watch particularly in the industrial business.

Good afternoon. Two questions, so first on the institutional growth rate as you think about the cadence of this year and the pricing initiatives you have underway, should we see that business sort of exit the year at about a 4% to 5% kind of run rate? Is that a fair way to think about it? And secondly, can you give a little bit of flavor about colloidal and how long you think that can sustain a double-digit growth rate?

Yes, I'll do the small one first. Colloidal, I would say colloidal is an interesting technology. We have it; there's capacity constraints in the world and other areas will continue to drive the growth there. But that business we're going to continue to manage, we think very intelligently for cash and return and other things. We want to do the right thing for our customers. But we're also going to do the right things for shareholders as we look at this business. In institutional, yes, I would say there's really not a caveat because if you want to say do we expect to be at a 4% to 5% run rate if on December 31, the answer would be yes because by that time, we would have no longer be lapping the lost business, right. It would be pretty much out of our sales. So I think that would be a comfortable yes that we would exit the year at that run rate because of that.

Okay. And can you give a bit of a flavor for how you're thinking about the sales force incentive programs that is are you comfortable with the current sets or are we going to go through one of these periodic refresh and refocus my calls? Can you just give us a sense for where is your rationale on that?

I would say we re-look at comp every year and make minor adjustments almost every year. And there are episodic times where we go through major adjustments in a given business meaning we went through one in the past about three years ago, quite successfully I would add, you could even see it in the business, but we change a comp there dramatically. In institutional, there's certainly areas of that business where we are going to revise comp programs partly to reflect new regulations or the way regulations are being enforced and some because we think it's going to just. We'll do that in a way like we did with the past where I don't think it's going to be visible to anybody except those in the business. You know we want great people. We want great people the incentive to do the right thing and also incentive enough where they want to continue to stay here and can make enough money to make a career out of it. And so we always have evolutionary change around here and I wouldn't there's nothing on the horizon that I would say would be noteworthy.

And maybe if you wouldn't mind just one last one on healthcare. Is there a reason why the business model there hasn't flexed more in response to these disappointing growth rates? I mean, like why it hasn't evolved into a partnership with an insurance company or some kind of other way to get an end run around the bottlenecks that you've seen in terms of the purchasing managers.

We've certainly looked into various options. Our healthcare program, which we're focusing on, is performing well. These programs include initiatives for room cleaning to reduce hospital-acquired infections as well as central sterile practices. While these programs are still relatively small compared to our traditional product offerings, they are growing at a faster rate and becoming a larger part of our portfolio over time. Consequently, this growth will gradually be reflected in sales, though it will take a bit more time. The team is on the right track, and uptake is encouraging. In Europe, we have a somewhat better mix and anticipate mid-to-low single-digit organic growth. Our programs in Europe are performing well, and some of these initiatives are being introduced to other regions, including the U.S., as we obtain the necessary registrations. Overall, we believe that our healthcare business is on the right path, and while we aim to accelerate growth and improve results, there are positive developments occurring beneath the surface that we want to continue focusing on for long-term benefits.

Thank you.

Hey guys, this is Josh Spector on for John. Just a question around energy, given some drivers with spin around customer buying patterns shifting and maybe moving a bit away from the Ecolab heritage model and slower growth there in the quarter, do you see any risk of another shift going on that could impact the second half? Or do you have pretty good visibility into the sales growth there?

Yes. The energy quarter showed a slight decline in sales of 2%, which we had anticipated would be relatively stable going into this quarter. Therefore, the 2% drop was in line with our expectations, although forecasting in this sector can be challenging. We anticipated these results for two main reasons. Firstly, there has been a significant decrease in activity, particularly in the Permian region. Other companies in this space may experience even lower sales rates than we have. So, we are not alone in this, and we might actually be on the better side. The second reason is that we are comparing to a high baseline, as last year's first quarter saw an 11% growth, partly driven by one-time factors that we expected would not repeat this time. This is why we approached the first quarter with caution. There hasn't been a change in customer buying patterns, and we are not losing favor in the market. We anticipate that as the year progresses, top line performance will strengthen. Importantly, despite the 2% decline in the first quarter, we still saw double-digit growth in our LI business. We are successfully improving margins due to pricing initiatives discussed last year, along with strong cost-saving measures affecting both gross profit and SG&A. We expect mid-single-digit growth in this business for the year, along with significant margin recovery that will result in much stronger overall results. Therefore, I am optimistic, as the actions taken in the energy sector are strategic and will yield positive outcomes this year.

Okay, thanks. And just a quick follow-up on the energy spend. I don't know if it's too early to ask about any numbers around that. But I guess if I try to think about how much amortization stays with Ecolab and goes with the spin, do you have a rough cut there?

Yes, $170 million of amortization goes with the spin.

Thank you. Thank you, Doug. You have new competitors, in the last six to nine months in water and institutional. How are they acting in the marketplace?

Our new competitor in the institutional space is the new owner, and their behavior hasn't changed; they still act aggressively at times when bidding for new business. This has been their approach for many years. Throughout the last 30 years, and particularly over the past 15 to 20 years, there have been instances where we've opted to walk away from business opportunities that wouldn't generate profit or cash flow. We believe it's not wise to remain in those situations. We've encountered this recently, as well as in the past several years. In many cases, these businesses eventually return to us, not always, but a significant amount of the time. Our priority is to ensure we deliver exceptional service to our customers. We need to remain profitable to continue investing in innovation and digital initiatives, and we must operate with discipline. Regarding the water sector, GE Water, now owned by SUEZ, doesn't seem to differ significantly in daily operations. We believed we were competitively positioned against GE Water, and even with their new ownership, we feel well-established as a competitor in this market. The strong results reflect this confidence, indicating that our competitive landscape hasn't changed dramatically.

Very good. And just selling, you delivered product costs. I know there'll be migrating of the year. What were they up year-over-year in Q1, Doug, and what should that be up by the end of the year on a quarter or maybe on a Q4 over prior year basis?

Yes, we're forecasting 3% to 4% inflation for the year. You know, I'll be honest, for the first quarter was, the most significant year-on-year 5 plus probably percent increase in the first quarter, but at a base for two reasons. I mean, mostly because we start running into an inflated base. If you will i.e. raw materials got more expensive throughout the year last year. So the Delta decreases as you move forward. As long as you don't see dramatic inflation this year, we have some inflation forecasts this year. We've held that forecast last year, we got burned on raw materials. The indices we follow, we are completely wrong last year. If you looked at the indices this year, they would say that inflation is going to be less than we have forecast currently. We don't know if that turns into upside for us or not. We're being a little more conservative this year based on last year's experience which means we'll be wrong two years in a row I hope.

Thank you very much.

Thanks. If I could just ask a question on pricing and you touched on this a bit earlier in the institutional comments but just want to know how price was across the segments if there were any meaningful discrepancies or anywhere where you were still need to work a little bit harder. And then just within institutional is price flattered at all by the exit of the low margin businesses in any meaningful way?

No, but they would show up in for us in more mix and it would have an absolute price the way that we measure the margin stuff, I would say two things. We continue to accelerate on price, if you will, it's five quarters in a row. And so, it still is around the 3% rate, industrial had the strongest price number they needed because one they were probably the furthest behind and have been playing catch-up and doing a very good job doing it but they got a couple of years a big raw material inflation numbers in their business and they're working to recover those and obviously working with customers to do it in a way that works, etc. Institutional always takes more of a slow and steady approach on pricing. They don't get hit in rock significantly with raw materials as some of our other businesses do, partisan mix of the raw materials in part is solids and the other technology that they've deployed over the years and so they've got a lower more like a two price year-on-year and energy was also 3% in the quarter as well, energy also obviously see significant plays and we expect to continue to get pricing throughout the year, we need to, we have margin recovery goals. Our plan isn't to expand margins during this cycle, but we certainly our goal isn't to lose margin either as a result of this, and we'll expand margins through our own efforts internally i.e. leveraging the SAP implementation and other work to help improve margin and or innovation, but that's where we are on price. I would say the team is doing a very good job in a very, it's always hard.

And just as a follow-up on the de-stocking, it sounds like from your comments earlier that this would be something that would take place within a quarter that it wouldn't straddle two quarters based on your look at the printouts of the books and stuff in the conversations with the distributor customers is that correct?

Yes, we don't expect. I mean, look we don't control, and absolutely obviously, if I went on history and we go through this literally every year in a quarter and obviously when it helps us nobody remembers it and when it hurts us you don't remember what the bounces back. And I would say this is a very normal thing, we would expect it to bounce back and as I said earlier, I don't know exactly if that's second quarter or third quarter but it's probably one of the two most likely that's typically the pattern we've seen in the past and there's no reason to believe that that won't be the pattern we see here.

Hey, good afternoon. Thank you. My first question is any update you can provide as to your circling the customer initiative, specifically which verticals it seems like food and beverage is one which may be sort of optimized in terms of selling your entire product suite to corporate clients and where you think there's room to sort of improve that?

Yes, it's been a crucial aspect of our strategy and a significant contributor to our success, especially in the industrial sector since integrating Nalco into Ecolab. From the beginning, we prioritized the food and beverage market. Over the past six years, the developments in this area have been remarkable. Particularly in the brewery sector, we've successfully combined water management with our food and beverage cleaning and food safety technologies to deliver exceptional value to our customers, which has increased our market share. This approach has been fundamental in our strategic market efforts and in generating value for our customers, contributing to our success. Additionally, pest elimination has always been an important factor. It has enabled us to explore other facets of the pest control business, such as fumigation, leading to recent acquisitions in that area to expand our capabilities, as it's essential to the food and beverage market. This illustrates how focusing on our customers drives both value for them and growth opportunities for us. There are other examples as well; we're seeing technology being utilized effectively in quick service restaurants and aspects of our food retail business alongside our institutional capabilities. There’s much more to discuss, but I don’t want to take up too much of your time.

No, that's helpful. As a follow-up, regarding health care, did your go-to-market strategy in that segment need to change? Specifically, is it more of a C-suite type sale? Are you possibly engaging with the wrong people in health care? I'm interested in understanding if this aspect of your go-to-market strategy is affecting growth. You may have touched on this, but any additional insights would be appreciated. Thank you.

I believe we previously discussed health care, so to summarize, we've been strategically focusing on program sales in that area. The programs we have in the market are experiencing growth and we're successfully selling them. These include initiatives related to room cleaning, HAIC reduction, and operating theater efficiency, as well as central programs; all are performing well and expanding. However, the challenge, particularly in the U.S., is that these programs still represent a relatively small part of our overall portfolio. This small scale can overshadow the product sales that make up the rest of the portfolio, which lack the same strategic advantages we have with program sales. We are committed to pushing forward with program sales, and over time, as they grow three to four times faster than other segments, we expect the sales to reflect that growth. Our strategic focus remains on this area, and we are engaging with the appropriate stakeholders. While we are not neglecting the product side, we are facing a different competitive landscape, which is why we are directing our efforts toward programs.

Good afternoon.

Hello.

So first, Doug, your industrial business, can you just give us an update on the industrial business in China? It's hard to know what's going on over there sometimes, but your numbers are so strong. So just curious if the market is getting better or worse or about the same?

Our China business experienced mid single-digit growth in the first quarter, resulting in decent profits. This growth was primarily driven by the institutional sector, which saw double-digit increases. However, the industrial segment remained flat to slightly down overall, largely due to a significant decline in paper production, as there is less corrugated material being made for export shipments. The ongoing trade discussions are having some impact on us, but we do not expect these issues to negatively affect our China business for the entire year. If we can reach a trade agreement, it should provide opportunities, but even without that, we believe we have more positive developments than negative ones, which leads us to anticipate a successful year regardless.

Okay. Thanks for the update. My follow-up is on SG&A, SG&A adjusted for one time, it was actually lower than the last year despite revenue growth. Is that primarily the result of your cost savings initiative, and do you expect a similar dynamic through the remainder of the year?

Yes, I would say SG&A certainly we have strong cost savings initiatives in place. We would have said in the first quarter probably delivered about 20 million bucks, which is on page to the 80 that we've talked about. For a handicap the year, we probably have upside on the cost savings side of the initiative pile in terms of you need some upside because you never know what's going to happen and other things like FX, etc. So yes, those are driving it. We're also leveraging technology in a number of parts of our business as we go forward, and this is also enabling us to do more via each person. So it's a combination of things but cost saving certainly is a driver.

Okay. Thank you.

Yes, thanks for taking my question. A quick or one or two of them, one on the raw material front, where are the buckets that you're actually seeing the inflation because it does seem a little bit counterintuitive, given oil coming off the way that it has that you are forecasting something in kind of the low-to-mid single digits for the year. So maybe help us to understand where you're seeing some of those pressures.

Yes, well, oil year-on-year is up nearly 50%. So, it's you know, we got to go compare back to Q1 last year. That's what our comparison is here. But beyond if you will sort of oil derivative raw materials, certainly caustic is up for us, transportation costs grew double-digit last year, particularly in the U.S., but we had inflation also in other markets, Europe in particular. So, our two biggest markets, if you will, so the number of areas where there has been inflation in raw materials. And you know, I would say last year was significant it followed a fairly significant year, the year before. So as you kind of a two-year run, we are forecasting, moderation in the inflation rate, but not deflation this year. We still think that's the right forecast. And we hope we are on.

Got it. And then it's been a couple of months since you announced the split or potential or the upcoming spin of the upstream energy business. Can you speak to whether or not you've seen interest from potential buyers in that business at this point?

Yes, that's not something we would comment on publicly one way or another.

Thank you. So when you look at your various platforms, what are the largest opportunities to improve margins over the long term outside of simply price cost suppression, perhaps shifting more even more, I'd say to a service model and just, I know institutional in Europe has clearly been a longer-term opportunity, but where are the other ones that long-term you know guys should be thinking about? Thank you very much.

Yes, I believe there are several areas for improvement. We initially started in Europe, where we achieved a 3% operating income margin and are now approaching double digits, a progress made over 7 or 8 years. The opportunities we identified in that region are still present and can be found elsewhere as well. With the recent implementation of SAP across our supply chain and finance systems, we have gained better visibility into the U.S. markets through ERP, replacing an outdated system we believe to be around 40 years old. As a result, our visibility has significantly improved, which we anticipate will lead to substantial savings in our supply chain. The pricing dynamics in North America have changed considerably over the past two years, and we recognize the need to adjust our supply and manufacturing strategies accordingly. Our goal is to enhance our standards, not just by reducing SKUs but by focusing on formula reductions. This will lower raw material costs and increase our purchasing efficiency. There is a lot of ongoing work in this area, particularly in energy, water, and other sectors. Analyzing margins across our business units indicates there is considerable potential for improvement in water and other segments acquired through the Nalco purchase; their margins have already improved, but we believe there's still room for growth. We aim to continue pushing forward in this aspect. We project a growth of 50 to 75 basis points in our typical run rate, especially with our accelerated initiatives and cost savings initiatives. Given the recent increases in margin recovery zones, we expect to significantly exceed that range for some time as we work to regain our momentum and rebuild our margins.

And yes, I apologize for the stereotypical simple sell-side question but can you comment on the overall M&A landscape particularly in Asia and Europe. Thank you very much.

Well, Europe's probably as good as it gets in the U.S. right now simply because a lot of people were unsettled. And with that often comes opportunity certainly in the U.K. but I would also say on the continent in terms of Asia, you know, I mean the challenge in Asia is scale and culture, i.e. can you buy a company that's meaningful enough in size to be worth the risk and the effort to bring it on and integrated and then culturally, and this isn't the Asian culture, just make sure it is a company what the company's culture and how it been built in terms of how it sells and creates value, etc. So there, you know, we've got to be make sure that it's a company that we would have a right to own and run as we go forward. Generally, I guess, you know, I think we're going to enter a period where, you know, acquisitions of even size are going to make sense again. I know it'll happen, I don't know exactly when it's going to happen. But being smart about the price you pay is always a good idea. And it proves out over time, we believe that value is created through return on invested capital and our ability to generate cash. And those are the things that we look very carefully at when we make acquisitions that can we do those things over a period of time, and the answer is yes, we're all in it; the answer is no, we're quite careful unless it's got some seminal strategic value beyond just cash creation, which is hard to find often.

Hi, good morning. I was wondering Doug if you can talk a little bit about what kind of trends you're seeing in restaurant foot traffic and if you could maybe talk about that by region, sounds like really, really outside of Latin America, nothing's really much to write home about.

Yes, Mike, I agree with you. I don't believe that foot traffic is going to impact our business significantly. We're focused on fast growth in food services in Asia and are working on capturing market share. Over the past year, we've made several important moves in China that we believe position us better for accelerated growth. The business there is already growing in the teens, but we expect it to improve further. In the U.S., foot traffic has always seemed soft to me, yet every time I enter a restaurant, it appears to be busy. I'm struggling to reconcile these two observations. Overall, despite this, we've experienced substantial growth. There are countless restaurants we have yet to reach, and we aim to engage them. Until we've secured a significant market share, foot traffic won't be a primary concern for us.

All right. And then when I also ask about the strength that you're seeing in food and beverage, are we seeing any improvement at all in the underlying market there or is it really just share gain that we're still capturing?

That's principally driven by share gain. I mean people are still eating obviously, but you know you've got some markets that are still fighting through some challenges. But you know the team's done a very good job for all the reasons I discussed earlier partnering with water and Pepsi, etc., driving outsized value which is leading to some very significant wins.

Thank you. Good afternoon everyone. Doug I was wondering if you could give us a little more detail on how the changes you have made in order to grow faster in China. You said double-digit is good but you can do a lot better. So what changes have you made?

I think in a couple of areas. So if you want to talk institutional we've organized a bit differently simply because that food service market is developing differently than markets have in the past, part they get to learn from U.S. history and European history. They have concepts which don't fit neatly in boxes, and we've got to go be prepared to offer what those concepts need and around service custom designed for those concepts not maybe the same exact service package that we've had in other markets so designed for China. So we've invested more if you will on innovation resources in China, on digital for China, resources in China, organize our constructive businesses a bit differently to allow a better blurring of lines and have somebody overseeing it, so they can make smart choices for customers first and by doing that for the company. So they've been a number of steps and most notably increased resources. And so for all those reasons we think we're just better positioned, we've learned a lot over the last few years. We've done decently. But as we look at it we just thought the way we were structured and the way we were resourced was a hindrance if you will not an offensive weapon, and we wanted to change that.

Okay. Now that you have your SAP installed internationally, can you see the potential benefit from the restructuring as being greater than the 325 million you initially estimated?

Yes, we agree that more would be better for the business as long as it doesn't affect our ability to serve customers. However, we're not in a position to raise our estimate at this time. We recently increased it by 125 million from 200 to 325 million when we announced the spin, which will help us cover the 70 million in estimated stranded costs and still deliver 200 for Ecolab post-spin. I believe we're doing well in this regard, and if there is an opportunity to do more, we will pursue it. It benefits us and our shareholders, which is our primary responsibility.

Thanks and if I may squeeze one in. You said that you were expecting to close the Bioquell acquisition by the end of the year by the fourth quarter. Are there some issues regarding the competitive environment, are you dealing with anything that you may have to change?

Oh yes. Bioquell we did close. I mean we've close but we're going through a competitive review and you know I would say right now you know we're working with the authorities and in the appropriate way and that's the path we'll follow.

Thanks. Good afternoon Doug. Specialty has been a real bright spot in global institutional another good quarter and you cited I believe some business wins. I saw also that second quarter may slow down a bit on new customer rollouts but still a solid year. Please elaborate a little bit on this sub-segment, what is going on with the new business wins in some of these initiatives that you've highlighted in the release. Thanks.

Yes, I would say both the QSR teams and the food retail teams are doing a really good job of one driving new business. They're leveraging innovation to do it. They have a strong pipeline. They've been at the forefront on institutional and digital food safety technology which is already making a difference and we think going to make increasingly a difference in their ability to secure new wins going forward. That's been significant development cost which has really been borne principally in the institutional side of the equation. And so you know that starts bearing fruit. I think you're going to see enhanced margin as well as we go forward. There are a number of large opportunities that exist both in QSR and as far as U.S. and around the world that I think our team is doing a good job targeting and getting after. There are occasions. So we give you a heads up on Q2 that they may have slower than current run rate sales for a quarter that's on a lap an unusual quarter the year before where you might have had a pipeline load for a new customer i.e. you've got to build their distribution network and their stores simultaneously which just means you get four months and three you know, and when you lap that it's tough to replicate it. So, we just try to give fair warning that occurs in many of our businesses occasionally through quarters throughout the year.

Thanks. I have one more question. The capital expenditures and free cash flow are somewhat lower this year in the first quarter compared to last year, which was a unique comparison. Do you have any thoughts on what we should expect from these two metrics for the full year, even though it's still early in the year?

Dan, can have that one?

Thank you. Sure. Absolutely so, yes, you're right, it was annualized. And first of all in the first quarter of '19 against a very strong performance last year in which we grew the business but consumed almost nothing in the way of incremental cash flow. So part of the year-on-year comparison is what you're seeing. Look, we still feel great both about our longer-term record of delivering great cash flow generation from the company and think that 2019 will be another great example of that. So sitting here today, I expect that our free cash flow conversion which is the metric that I track most closely will be in the mid 90% range. So feel good about cash flow and how it's developing and for the year.

Great, thanks.

Hi. Thank you. This is on for PJ. In water, could you discuss the growth profiles in light industry versus heavy industry? Also, could you provide an update on 3D TRASAR penetration?

Yes, they were very close in fact. Not a big differentiation in growth rates between heavy and light. So both performed quite well and we expect both to perform well for the year, terms of 3D TRASAR unit penetration at this point time, I mean we're nearing 40,000 units outstanding if we give you an exact number if it's important if you want to call Mike or Andy.

Okay. And then secondly, your first quarter volume growth to 1% is kind of lagging the overall fiscal year '18 with 4%. How do you see that going forward? And do you expect price to make up delta?

Yes, I mean the 1% was clearly impacted also by FX and FX is going to be a particular challenge in the first quarter and second quarter, but at current rates and forecast not a significant challenge in the second-half. So, some of it's just that. The other we talked, institutional, which we expect to improve, and energy we expect to improve.

Thank you for the update.

Thank you. That wraps up our first 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, and our best wishes for the rest of the day.