Ecolab Inc (ECL) — Q1 2020 Earnings Call Transcript

Thank you. Hello, everyone, and welcome to Ecolab's first quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO; Christophe Beck, our 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 Ecolab's website at ecolab.com/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 described 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 an overview of the results, adjusted earnings per share grew 10%, reaching the upper end of our forecast range. Results reflected good underlying sales growth, pricing, and cost controls, which yielded the first quarter's earnings increase. COVID-19 had a modestly negative impact on sales, but a minor benefit to earnings from cost controls. Acquisition-adjusted fixed currency sales increased 2%. The institutional and Healthcare and Life Sciences segment showed good sales growth, which more than offset a 3% decline in Upstream Energy. Excluding the Upstream Energy segment, Ecolab's acquisition-adjusted fixed currency sales increased 3%. Adjusted fixed currency operating income rose 12% with operating margins expanding 110 basis points. Pricing, improved volume growth, and cost savings initiatives more than offset investments in the business and other selling-related expenses during the quarter. Progress continues on the separation of our ChampionX business. We continue to expect the transaction to be completed by the end of the second quarter. Ecolab's leading capabilities in food safety, clean water, and healthy environments have positioned us well as an effective partner in this world crisis. And we've responded aggressively to the pandemic. As more fully outlined in our March 25, COVID-19 webcast, we have taken a broad approach to further bolster our already strong financial position and cash flows. At the same time, we are working aggressively to safely assist our customers, providing them important product, service, and consulting support that they need to keep their operations safe and functional for the present and have them well prepared for when they reopen. We are also preparing growth plans to aggressively drive new business gains as the recovery develops. As previously communicated, the uncertain outlook regarding the full extent of the pandemic's impact on the global economy and its longevity do not provide an adequate basis for us to provide either quarterly or annual earnings forecasts. As a result, our forward-looking guidance remains suspended. 2020 represents an anomalous period of unprecedented proportions. As the world navigates the challenges from COVID-19, our food safety, water management, and infection protection positioning have become even more relevant. Our long-term growth opportunity remains robust, driven by our leading market positions and our focus on providing our strong customer base with improved results while lowering their water, energy, and other operating costs along with our substantial remaining market opportunity. Further, our financial position is strong with ample liquidity and resilient free cash flow. We believe looking beyond the near-term uncertainty and focusing on these sustainable long-term business drivers will yield superior long-term performance for Ecolab and for our investors. And now here's Doug Baker with some comments.

Thanks, Mike, and good day to everybody. So, I'll just offer some comments on Q1 and a bit of perspective on 2020. Our Q1 adjusted EPS results were better than expected, as we realized expected business acceleration versus Q4. The COVID-19 impacts were different than we anticipated. COVID-19 did negatively impact sales but also drove lower expense in travel and entertainment, benefits, and other costs, which more than offset the sales impact. But this is not a pattern we see going forward. We know the coming COVID-19 period will be more adverse. But importantly, we entered this period in a position of strength. The business and company are in very good shape. We've got a great, very experienced team that's been through crises before. We've got a resilient business model that generates cash regularly, and we have a strong balance sheet and cash reserves. So all of this is important as we expect the COVID-19 period to extend into 2021, and we believe the recovery will be shaped more like a U than a V. Finally, we also believe that COVID will have a significant impact on our business, short term, quite negative, but longer term, quite positive. So our guiding principle is really to manage the short term in a way that positions us for maximum long-term benefit. That's where the value is. So, we've already taken a number of steps to do this. We created a cash reserve backstop. We cut expenses. We put in hiring freezes, eliminated merit increases, et cetera. We've also cut capital by 50% versus our budget but preserved digital antimicrobial and hygiene tech investments as they were. Now, these are detailed examples of steps we've taken and how our approach of managing the year to maximize our post-COVID potential shows up. But let me offer some perspective on the year in the future. First, 2020. Like it seems everything is with COVID, the outcomes are going to be asymmetrical. We have businesses having record years, or that we expect to have record years like Food & Beverage, Food Retail, Healthcare, and Life Sciences. But we also have businesses competing in markets that have been virtually shut down, like Institutional, with restaurants, hotels, cruise lines, et cetera, really not in business in a material way. So, in total, the net impact of the pluses and minuses of these groups of businesses will be negative for the year on both top and bottom lines, and we've signaled that previously. The timing impact over the course of the year, though, is going to be imbalanced, too. Q2, we believe, is going to be the most impacted quarter as we realize both the full effects of COVID-19 volume declines driven by these temporary closures in key markets. Plus, we're also going to be realizing channel destocking at the same time. However, we expect Q3 and Q4 to start showing sequential recovery from Q2. This recovery during the second half will be driven certainly in part by reopenings, but also by expected increased demand for hygiene programs. Now, we're already seeing this across industries like F&B, Food Retail, and even in traditional industrial settings, where we hadn't had this type of demand before. The recovery will be further driven by a number of our own initiatives that we already have underway. Look, we're feeding and fueling segments with momentum, F&B, Food Retail, Healthcare, and Life Sciences. We're adding people, investing in capital, doing all the things that we need to do to build on that momentum. We're launching new offerings, particularly in hand care and sanitizer categories. We're maintaining growth investments in animal health and data centers, which we have seen as great growth opportunities before COVID, and they remain great growth opportunities. And finally, we’re actively pursuing new strategic customers. This is a great time to continue to discuss the benefits that we bring in good and difficult times. All of this represents what we call the early-stage development for the world after COVID. Our business will certainly be pressured this year, but we'll continue to generate positive cash flow and gain share throughout the year. We believe our clear leadership in hygiene, antimicrobial, digital, lowest use cost delivery; and environmental offerings will be even more valued after the pandemic has passed. And a number of important factors we believe will remain true. We will still chase a huge market. We will still have a sizable competitive advantage. One might argue that our competitive advantage will be improved. We're in better shape than most of our competitors to handle a situation like this. We will have great customer relationships as we demonstrate we're the right partner, particularly when the going gets tough, and we will have answers for water scarcity, which will still be a huge issue. Finally, our ESG advantages will remain significant and important. But we also believe that there's going to be new transformational opportunities as customer and community expectations evolve. This is where we will put extraordinary time and effort as we move through this year. We see building an even broader and more robust set of annuity businesses as the highest priority for the year. This is what we've got to use this time to do. It's why we so firmly believe that managing through the short term in a way that positions us for maximum long-term benefit is the right play. So with that, I'll hand it back to Mike.

Thanks, Doug. That concludes our formal remarks. Operator, please begin the question-and-answer period.

Good afternoon, Doug. If I could just build on that last comment you were making. If I could ask you to break out your crystal ball for a second, how are you thinking about what the world looks like a year from now? When all the governments and corporations have retooled their cleaning and sanitation programs and protocols, where's the puck going? And how are you positioning the company to best take advantage of this likely increase in your value proposition?

Well, I mean I guess early read is twofold. I mean, I think we're quite confident that there's going to be heightened awareness and sensitivity towards hygiene concerns by consumers, which ultimately is what's going to drive businesses to raise their standards. So, I think we'll see this in a variety of ways. If you went back to some of the earlier almost pandemics, they caused many commercial buildings for the first time to put things like hand sanitizer in their lobbies. I would say that was a baby step to what we feel might be the potential here. I think consumers are going to be quite aware of their surroundings. They're going to be quite sensitive to whether things are actually clean; they're going to want visible signs, call it cleanliness theater. How does this show up? How does it manifest itself, et cetera, and this is going to be quite important to consumers. And it's a consequence to our customers. So that's obviously one big area. The other is we've all had this very different experience now with digital. And the interesting part is, so have our customers. And so while we've had a big digital advantage, and I imagine we're going to ask questions about this, it has proven to be invaluable during this time because it allows us to provide service levels, awareness levels, maintenance, ongoing vigilance that you couldn't do if you weren't connected in the way we were. Some customers who I think were reluctant to the party in some industries, say even in the food and beverage industries have become real big converts. I think this is going to be true broadly, that the push that we have in digital is going to prove right, and that we really do want to accelerate connectivity with our customers. We want to connect our supply chain in certain ways to customers. We want to make sure our field is adequately connected to us and to customers. And so a lot of this area, I think, is only going to become more important. I think we're all somewhat, maybe I am, surprised at how effective we are able to work remotely. But we're still only touching, I think, the tip of the iceberg there. And as we get this connection, I think our value, our know-how value, our unique information stream value, our potential AI value, all gets heightened even further because we've got a great amplifier for it. And then there's a lot that we don't understand yet that's going to, I think, reveal itself over the coming months. That's exactly how we're approaching this. We have confidence in a few things. And we are watching and learning aggressively in other areas because I think this will reshape society, I think, in mostly positive ways. It's a very terrible thing to go through. But how it comes and manifests itself can be very important. And in a couple of areas, we're quite confident it's going to be quite positive for us.

Okay. Thank you. My second question is on raw materials. And I mean, this was years ago. I think I remember you saying that if oil ever broke $20, you'd hedge it out as long as you could. And I mean that was a different time and things are moving fast here. But what is your long-term view on the price of oil? And might the company get more aggressive with hedging right now? And are there issues with finding counterparties in this environment? Thank you.

Well, I have the great benefit of a lousy memory. So I have plausible deniability about everything I would hedge oil if we got below $20, which doesn't mean it didn't happen. It just means I have no recollection. So here's what I would say. We don't take hedge positions like that. For the simple reason, nobody buys our stock because they think we'd be any good at this. And we'll hedge transactions that are known and specific and discrete with discrete timing, but that's really the extent of it. And if we start straying there, just kick us because that's not what we're about. What we're about is creating great programs, meeting customer needs, and creating value that way. In terms of crystal ball, I mean, obviously, I don't have one. When it comes to oil and some of the other stuff, I would just say this too, I don't believe this is the end of cycles in the oil business. That's a very hard call. You can see how sensitive it is in terms of there is inventory space for the top, which is why it moved so radically when supply and demand moves. Now normally, supply and demand moves by like a point or two during a recessionary period. Here we've had oil fall in demand by 17% in April. I mean, it's unparalleled. So I think we're going to watch it and understand it, but we are going to take hedge positions because we know we'll likely get it wrong over time.

Thank you.

Thank you. Good afternoon. Doug, you gave some color, obviously, in terms of the segments that are moving up and those that obviously been hit hard. I was hoping if you could maybe give some color on what the exit rates look like in the month of April thus far just to get some gauge of what that looks like?

Yes, what we observed in April was quite in line with our expectations. While you may not have had insight into those expectations, they align with the discussion we previously had. We anticipated that businesses benefiting from the transition from restaurants to food retail would likely see increased sales in our Food Retail sector, as grocery stores are making significant efforts to enhance hygiene standards for both their employees and customers, even within a pickup framework. This progression has resulted in higher demand for that segment. Additionally, this transition is leading to significant changes in the food and beverage industry, as they are adapting pack sizes from food service-oriented to more consumer-friendly configurations. This adjustment, along with increased hygiene measures for workers to ensure a secure workplace, has also spurred demand. In healthcare, there's a notable emphasis on antimicrobial products and hand care, which is what we anticipated. However, in the U.S., the suspension of elective surgeries has affected part of our Healthcare business, leading to both a substantial increase and a significant decrease in demand. Overall, the net effect in Healthcare remains positive as we navigate through these challenges. Life Sciences also maintained its strong performance prior to COVID and continues to thrive. Our acquisition of Bioquell over a year ago, which utilizes hydrogen peroxide technology, is proving crucial to meet customer needs during this time. We expect that this experience will promote ongoing use of this technology moving forward. Conversely, the restaurant and hotel industries are facing severe challenges, with cruise lines currently inactive. Therefore, around 30% of our business is under significant strain, particularly in the second quarter when many restaurants are closed. While we may see some reopenings throughout the summer, they won’t occur all at once. The second quarter is expected to be the most challenging, compounded by distributors having to scale back their inventories due to decreased demand, leading to a double hit on our performance. With such reduced demand, we are also facing a considerable decrease in profits because our cost structure is quite fixed. As a result, the second quarter is likely going to be the period with the most negative impact due to COVID.

Got it. And maybe just as a quick follow-up to that. In terms of the most impacted sectors to the negatives that you referred to, just some thoughts on what you're hearing from them kind of what the Main Street view is versus Wall Street today feeling pretty optimistic things are opening up. Just curious if you had any comments there?

We're observing global developments closely. In the United States, the situation will vary significantly because governors have more control in this context. They will respond differently based on their individual circumstances, including varying population densities across states. As we move forward, we are likely to see various reopening strategies emerge. For instance, Atlanta is making early moves and facing some criticism for it. Personally, I believe it's wiser to act a day late than a day early in this scenario. That being said, what's happening in the U.S. is not entirely predictable, but I expect some regions will start reopening and allowing restaurants to resume operations. Ultimately, consumer behavior will play a crucial role in this process. For example, China has reopened its restaurants, and while restaurant activity has increased from the lows, it's still not at pre-pandemic levels. Until there's confidence in treatment methods and the availability of a vaccine, I don't think fear will sufficiently diminish for people to revert to pre-COVID habits. The post-9/11 experience illustrates this well; even though travel resumed relatively quickly, it took two years for airline boardings to return to pre-9/11 numbers. This was partly due to the public's need to feel assured that the government could manage the situation effectively. I believe this current scenario will be more straightforward: if a vaccine becomes available, people's comfort levels will rise, and we'll see a quick return to normalcy. However, until that point, the reopening and the consumer's comfort with safety measures will evolve gradually over time.

Thank you.

Thanks. How do you see your role in business reopening? There have been several outsourced services firms highlighting the significant opportunity to assist with cleaning, disinfection, testing, and other needs for places like restaurants or office buildings. I believe your pest control business could benefit from this. Perhaps there will be some one-time sales of chemicals that are above normal demand. Is this a genuine opportunity in the coming quarters? Or in the broader context of your business, do you not consider this a major potential for you?

Well, I think certainly, we are well aware of the reopening, I'd say, challenges and opportunities that all of our customers face. They've got to start-up these operations again. They've got to do it in a manner that's somewhat different from the way they were operating before because of consumer expectations and real health concerns. So we are obviously doing a lot of work in this area to make sure that we can provide the help our customers expect from us. Yes, I mean, certainly, whenever you have sort of the reverse case, I'm making here, which is when you're going down like this, down in demand so suddenly because it's really brought on artificially as a consequence of municipal shutdowns, you also have not only the lost demand but the lost inventory. When they start back up, there's obviously going to have to be inventory pick back up. There's going to be kind of heavy clean work early before they get to more normal patterns. So there will be somewhat of the reverse as you go through this process. But I don't believe this is going to be one day that this occurs across the United States or across Europe. It's going to be a series of reopenings that I think are across a number of months. So I don't know that it's going to be a seminal event.

Okay. In terms of the impact of lower raw material prices, especially with the significant decline in oil prices, are you considering sharing some of those benefits with your customers, given the challenges they are facing? Or do you anticipate being able to retain most of that benefit for your gross margins, similar to what you've done in previous periods of lower oil prices? Thank you.

Yes. Our expectation is that raw materials will be less expensive this year compared to our initial forecasts. One of the contributing factors is the decline in oil prices. However, we are incurring significant costs beyond just raw materials. For instance, lower production volumes in our plants negatively impact our gross margins due to fixed and variable costs in manufacturing. Additionally, we've had to manage considerable transportation needs because of the surge in demand for sanitizers and other products. Our focus remains on doing what's right for our customers during this time. Therefore, I do not anticipate this situation will lead to a substantial pricing event. Think about the large hotel companies, small hotel companies, large restaurant groups, small restaurant groups. We are actively working to do and take our role seriously as long-term partners who benefit in the good times and understand how we can help in difficult times around fixed-fee arrangements, around some of the other aspects. How do we postpone and lengthen agreements and do things that may accentuate the short-term pain, but we think is exactly the right thing to do when you expect to be partners going forward for decades as well. So we're taking those steps, which is a little bit why some of the Q2 conversation. But I believe we are positioned smartly and intelligently to manage through this in a way that will maximize long-term gain for this company. And that's exactly what our mindset is.

Hi, there. This is Katherine Griffin on for David. Thanks for taking my question. So first off, on the COVID update call, you discussed seeing some improvement in China in March in Institutional customer activity, seeing that begin to improve, whether it was lodging occupancy improving. I'm curious if you've seen that trend continue so far in April?

Yes. I would say our recovery in China will be uneven. We mentioned in March that it would be around a negative 9, but it turned out to be better than expected. We have witnessed a continued recovery in our business in China, both in the Industrial and Institutional sectors. The recovery in the Institutional sector, as I mentioned earlier, is gradual. At the lowest point, lodging occupancy was below 20%, and it has now risen to around 35%. It is improving, but not quickly. To put it simply, the decline happened more rapidly than the recovery. Therefore, I believe the recovery will resemble a U shape rather than a V. There are several factors at play beyond what we observe in China. In the foodservice sector, recovery is taking place. However, China remains cautious about fully reopening due to concerns over a potential resurgence of infections. This ongoing pattern influences my earlier responses. Overall, the recovery in China is progressing in a positive direction, with sales improving slightly faster than we had indicated during our March 25 call, but the overall trends remain consistent.

Great. Thanks. And for my follow-up question. So, you talked about the digital investments being directed in hand care and BioQuell. I'm also curious as you think about how to prioritize these investments, is it more to help specifically for your Institutional customers meet their needs near-term or are you focusing those efforts more on long-term solutions you anticipate your customers might need? In other words, have you gotten a sense of how urgently and to what extent your customers are looking to adapt to a post-COVID-19 environment? Do you think if they're looking to just do simple dispensers or double down on purchases of disinfectants? Or do you think that there is urgency as early as this year to invest in more advanced solutions, maybe something more like what your BioQuell applications would be used for?

Yes. So, Katherine, I would say, well, it's a combination of both, to be honest. So, look, we're doing some work, and I'm going to have Christophe fill this in because he's leading the charge on the digital investment. I mean, there are near-in opportunities, but we believe they are long-term needs around digital training, for instance, and how we utilize that capability to enable large customers to open quicker and more effectively, but also have a technology that will provide legs in terms of their ability to use it on an ongoing basis. Other areas, its fuel connectivity and the like, but let me ask Christophe to speak to some of those.

Thank you, Doug, and hi Katherine. So, thanks for the question. What's good with digital is that we remain very consistent in our focus, in our investments over the past few years. It’s just going to get accelerated now, but the direction doesn't change. Just as a reminder, our three big pillars in digital are first, to enhance the customer value. You can think about it like a hand care compliance in a hospital, making sure that the whole healthcare personnel is really maximizing, so the protective measures that they can have with hand care products. The second is, really so to maximize our field impact, which is really to facilitate the work of our teams. And third, it's to improve our operational performance. Those are the three big strategic pillars that we've declared many years ago and that we've really remained focused on. When we think in terms of alignment with what customers truly need, remote monitoring, as you've heard as well. The fact that in many places we can't even go in, even if they're operating. The fact that we have the systematic center, we can provide service and value even if we're not there physically. The second one is automating as well also our customer processes. Well, that helps them reduce their costs while we're not there as well. But it can be, as well, the predictive analytics that we're doing so for regional disease, for instance, in here, whether that's reducing the risks as well for customers that truly need it now. Last but not least, our compliance, as mentioned. So, for instance, the hand care compliance program for hospitals that I mentioned earlier, while in this COVID environment, this is even more useful for our customers. To take again what Doug said a few minutes ago, well, the hygiene standards are going to go up in the next few quarters, few years. We believe how much we can debate that. Obviously, while digital technology is going to help us, help our customers even more. So that would be my take.

Thank you. I'm glad you all sound well. Doug, some countries, Sweden, South Korea, Taiwan, have kept full-service restaurants open. Do you have any evidence yet of increased product use per location in any of those areas where full services stayed open?

No. They're relatively small. What I would say is, we have a number of QSR restaurants open. We have restaurants open in other markets, where we've seen certainly heightened sanitizer sales and hand care sales in particular. That, in many cases, is even offset lower traffic.

Okay. And then propylene, surfactants, and other chemicals are coming down. Do you think you'll get some help in the second quarter from lower raw costs? Or will you be buying so much less that it's going to take longer before you see the benefit of some of these lower raws?

Yes. No, I mean, the lower raw costs, we would expect to have a benefit in Q2. But it's just going to be because of volume destruction in the Institutional business, in particular, which is short term, but acutely focused in Q2. What that does to plant overhead absorption and the rest, that's going to be much more of the story.

Okay. Thank you.

Great. Thank you very much. In terms of your supplemental commentary regarding Healthcare and Life Sciences trends, are your customers solely in reactionary mode still? Or are there already discussions on how to further develop their programs over the long term? So, basically, where do you believe you'll offer the most impact in terms of your Healthcare and BioQuell platforms? And on the former, how would you rank yourself in terms of the competitive environment? Thank you very much.

I’ll provide a brief perspective and then ask Christophe to add his thoughts. In competitive situations like these, it's essential to keep an eye on traditional competitors. These times often highlight our strengths, such as our balance sheet, financial model, long-term management, and scale. However, it’s also important to be vigilant about new entrants who might come in with approaches that previously seemed unlikely, as this creates new opportunities. We are also looking to venture into some new businesses ourselves. Finally, I'd like Christophe to expand on this. Several customers are in various stages of readiness, and I think healthcare is a particularly interesting area to discuss, along with some of our other sectors. Even those facing the toughest challenges are already looking ahead and engaging in conversations. Christophe?

Thank you, Doug. Hi Chris, regarding your remarks on reactionary versus proactive approaches, hospitals initially operated in a reactionary mode due to being overwhelmed by the influx of patients. We have assisted them with rapidly expanding sanitizing programs and disinfecting personal protective equipment, such as masks, ensuring they could address their most urgent needs as highlighted in recent media reports. The focus is now shifting toward more proactive measures, reflecting the value we consistently provide. For a long time, our role has been to help hospitals prevent hospital-acquired infections, which aligns closely with their current challenges. As the surge begins to ease, we observe hospitals returning to us, inquiring about ways to reduce infection risks moving forward. When considering hotels and restaurants, the experience has been somewhat different. They faced their own downturn, during which we supported them in maintaining operations through sanitation programs. Now, we are assisting them with planning their reopening, discussing necessary programs and products. We've conducted numerous webinars attended by thousands to help them understand COVID, how to manage it, and how to adapt going forward. This is also an opportunity to train their staff while using this time to enhance our services. Finally, we are providing audit services to ensure that everything we arranged together has been successfully implemented, effectively closing the loop.

Got it. Thank you. And just in your first quarter pest elimination results, you mentioned difficulties accessing customers for service, which I imagine is still ongoing. But do you ultimately believe pest will merge into one of the other kind of mega trends that you're seeing across water, hygiene, disinfectants, etc., just given the disease of all this component? Just wanted to hear what you're getting from your customers and how you see the global opportunity emerging versus, let's say, 2019 and prior years? Thank you.

Yes, I'll give a quick answer. The pest business, yes, I mean, the access reference was fundamentally some of the buildings are just closed. That's created some access challenges. They're short term. That will abate. We do not see any circumstance where pest services and our pest programs, in particular are going to be less valued going forward. We think the opposite case is probably the better argument.

Thank you and good afternoon, everyone. Could you share some insights into the very strong results in the first quarter? Do you have any thoughts on, aside from hand sanitizer, if there are other products you sell to customers that may have seen significant buildup?

Yes. I'd say a couple of things. The quarter, we were going to have a great quarter before COVID. We ended up having good earnings. We talked that sales were modestly negatively impacted from COVID, but we were realizing the recovery in Institutional that we had predicted and our other businesses are having a good quarter. Where we certainly saw heightened demand, even though we said there was some demand destruction in the first quarter as a consequence of COVID, certainly, hand sanitizers, surface sanitizers, really across Institutional and Healthcare in particular, but also in F&B and in some of the other businesses, where, I mean, the demand spikes fast. So too does a consumption, so we do not believe this is an instance where there are big hoarding stockpiles being built by customers. What you have is significantly more hand care consumption and sanitizer consumption as a consequence of this. So it's in places where you haven't had it before. That doesn't mean somebody didn't have a garage full of this stuff somewhere, but I don't believe that's the big story. I think the real story is consumption has jacked up dramatically in these areas.

Could you provide some insights on the market share opportunity? Are there new strategies in place as you pursue large potential customers that you haven't significantly engaged with in the past? Are you getting more involved directly, Doug? What steps are you taking to make this process more personal, especially considering that social distancing limits the ability of your sales team to operate beyond webinars? How are you planning to capture that business you've been aiming for?

Yes, we're not using the old approach of sending a large team out. Instead, we are using videos and other methods to reach customers. Executives are making some introductions, but overall, our corporate account team is strong. Over the years, we've found that these new environments create opportunities that were previously hard to access. There are instances where our technology meets new needs, allowing customers to see and experience our offerings firsthand, which validates our claims. We have been successful with several large healthcare clients and others as well. I'll have Christophe provide additional insights on this.

Thank you, Doug. Well, our philosophy is really to keep in mind that customers will remember how we dealt with them during difficult times. That's true for our existing customers, but also when we look at the market more broadly, the strength of our company gets accentuated and the weaknesses of others, too. We have customers who have been working with other companies in that meantime as well. Recognizing that they don't get what they're looking for with some of their current partners comes very naturally to us, which is a very good thing. We can supply large quantities that they need as we just discussed; those needs of sanitizing products go up and require capacity to do that. We have it to a certain extent. It's not unlimited, but we could provide much more. Last but not least, is the digital capabilities that we have that can bring it all together for them, understanding how they're doing as a customer. This is something that most companies can't do. So bottom line, yes, it's helping us, especially long-term.

Yes, thanks for taking my question. With regard to the Global Industrial segment, I guess, how resilient are you thinking of that business acting as we kind of go through this recessionary period? I mean, obviously, there are some fears on the Institutional side, but this one does seem like it may have greater resiliency. I guess, how should we be thinking about that?

Well, certainly not going through the shutdown scenarios that you're seeing in the Institutional side. So it has that. I think what we said in some of the transcripts that we released this morning or later on this morning was, we expected Industrial to be fairly resilient, equal to or modestly below last year in total. You've got some winners in there; F&B that we've talked about. But you'll have some large Industrial stuff going on, too. Christophe, why don't you talk a bit about how you see it?

Yes. We believe that Industrial, in general, will be less impacted, will be impacted in Q2, for sure, as most businesses ultimately. But as Doug mentioned, so Food & Beverage is going to keep humming, has been a very strong business before COVID, with very good programs, and very nice new business generation as well. The demand has just grown not only because people need more consumer goods, but those consumer goods companies need as well more sanitizing programs to make sure they can keep operating. We expect it to be flat to slightly below last year in aggregate with everything we know right now. Downstream is obviously being related to the oil and fuel consumption, but it’s a story of two chapters in here. There's the oil consumption, but it's also what we do for refineries that is stable no matter what’s out there. Paper is another interesting business in that situation where, obviously, e-commerce goes up and the whole towels, toilet paper, for whatever interesting reason, has gone up very highly over the past few months and seems to be fairly resilient so far. So, all-in-all, kind of stable versus last year to potentially slightly negative.

Great. Thanks a lot. And then Doug, I think I heard it, but I just wanted to clarify. So, when we think about the decremental margins as we go into kind of 2Q and 3Q, did you say it should be somewhere in the 50% range? Is that the right way to think about it?

I think what we were saying in total, fixed costs are around the 50% level, particularly early because you don't have time, if you will. There are costs that are theoretically variable. They are variable over time, but they're not variable on day one. Thinking, particularly in Q2, we're on a 50-50 is probably the better way to think about it.

Thank you.

Thanks. Good afternoon. Just kind of following up on that. You've already alluded to CapEx being down probably about 50% this year. Just curious about the thought process as you progress through the year and what you see, how would you think about maybe doing more, maybe doing less? Thanks.

I think it's important to note that we intentionally reduced our capital expenditures significantly for 2020. We did this because it's easier to increase spending later than to deal with having to make deeper cuts. Taking action early is beneficial. I expect that if there is any change from this point, it will likely be an increase rather than a decrease.

Thanks Doug. And just following that up. On the OpEx side, with regard to business investments, are you reining those in this environment or is that something you're going to go ahead with full steam and just fall through and look for the coming out stronger on the back side?

Yes. Again, it depends on what it is, but back to the things that we're quite confident in around antimicrobial program development and digital, both when you roll it out, et cetera, that takes OpEx costs, not just capital. We've retained all that money in the plan, and it's significant. The reason for that is we know it's absolutely critical to the future. It was before COVID. I would argue that we think it's even more important now with COVID, so all that stuff remains. What we're working to do, look, you could go and try to say, my goal is to make 2020 as good as possible. That’s going to be our overarching view. For our business, in our situation, we believe as a team, we're all locked in arm on this, that is not the right answer. The right answer is to manage 2020 responsibly and intelligently, but really with a mind on 2021, 2022, et cetera. And that doesn't mean we're going to be foolish or anything else. But I would argue, if you really went after 2020, given this is artificially induced, there is going to be recovery. Nobody's clear exactly how it's going to show up, that taking this and using time to your advantage, we have the ability to do that given the resiliency of our model and frankly, our balance sheet and cash position. We want our team focused on really all the stuff we've been talking about, the investments Christophe has been discussing around digital, connectivity and all that, the new antimicrobial capacity and ideas that we have, how to leverage Bioquell, how do we develop comprehensive programs for reopening and ongoing behavior for clients who need new stuff.

Hi guys. It's Dan Lazar for Laurence. How are you? You mentioned that you're seeing some inventory drawdown. I was wondering what channel inventories were before COVID. Were they lean or normal? I mean, certain companies are saying that their inventory's already lean. I was wondering how much can actually occur?

The inventory reduction we are discussing pertains specifically to food service distributors. While I can't specify the exact levels, we can consider them to be at a normal state. However, what was once considered normal has now shifted to being excessive due to a significant drop in demand resulting from the temporary closures of restaurants. What was once typical inventory has turned into surplus for them. The models influencing our analysis are reliant on consumption rates, and as consumption declines, it creates the appearance of increased inventory levels. They are not purchasing; instead, they are shipping more than they are buying, and the volume of shipments has decreased significantly compared to prior levels.

Okay, thank you. And then you mentioned during your prepared remarks that hand care and sanitizer products would go up and allow you to introduce some new products. I was just wondering what you're introducing now for hand care and sanitizer products, and how is it different from, say, what you were introducing, six months ago or before they started?

Well, I mean, a great example is driven by Christophe and team with huge assist from supply chain and everything else is, look, we ran out of capacity in our traditional hand sanitizer. So we went and developed new formulations that allowed us to build this on different filling equipment than we were using heretofore and start meeting inordinate demand. There are now, what I would call hand sanitizer 2.0 views of how that evolves from here. Something that happened literally inside of four weeks is now already being rethought about how do we move that in second quarter to even stage two. These are examples. Around the world, we had a lot of our team step up in very unique forms around antimicrobials, forms we didn't sell before, maybe were sold by others but in small amounts. They came up with ways of meeting consumer or customer demand that we really didn't have that capability as early as January. The team has done a very good job being responsive. What we're now doing is saying, okay, out of all these ideas, what are we really going to bet on? Where are we going to put permanent capital, if you will, behind some of these ideas, and there are a few already that we want to.

Thank you very much.

Thank you. Good afternoon, everyone. I was wondering if, given the situation with Upstream, do you think that there is going to be any change to the current agreement you have with Apergy? Are they going to take advantage of the situation in order to change something?

The way the agreement is written is even if they wanted to, they couldn't. Our agreements are agreements. We believe still that this will conclude successfully within the second quarter.

All right. Regarding the Food & Beverage sector, which performed very well, considering the shutdown of some meat packing facilities, do you anticipate any impact on that specific business, especially in the U.S.?

Well, protein generally isn't the highest consumption part of that business for us, but I'll throw it to Christophe.

Bonjour, Rosemarie. So maybe a comment on F&B. Interestingly enough, the plants that closed down were not customers. So obviously, that's not impacting us as such. To Doug's point, the meat business, protein business is not the major part of F&B. That's one that we're contemplating more for the future, but it's not big right now. On the other hand, those customers need more sanitizing programs that we can offer. So that's all good news for F&B.

Okay. If I can ask Christophe another question. You talked about what you were doing on the digital side. Given the environment currently, are you changing your focus on the digital needs of your customers? Or do you think you keep moving on the same path?

Yes. Great question. It's the latter, actually. So we're really trying to stay, not even trying. We are staying very firmly on the same path. If anything, it's to go faster. The interest of customers to be connected is growing, especially in situations where we can't get to the customer. This is a good argument to get connected in order to provide a remote service. As I mentioned before, automation is helping customers reduce their costs. This is something that we're accelerating because they will need it even more in the next few months and quarters. Whatever happens down the road, customers will need some savings in the total operating costs. They will be ready to invest more in our digital technology, and that’s why we ramp things up. Our speed of progress, we're not changing the direction at all.

Hi. This is Eric Petrie on for P.J. Doug, I wanted to ask, how do you see the magnitude of sales decline in U.S. and Europe compared to China? Guessing there's some differences due to the extended stay-at-home orders, but any thoughts directionally would be helpful, particularly in Institutional?

The situations are quite different in terms of development. Europe didn't act in a unified fashion. You had different countries because of disease progress at different points in time to act in different ways at different points in time. So there's no one answer that will work in Europe. I think what we've seen is, I would say, more similar than dissimilar, what clouds it sometimes is the percent hand sanitizer can kind of cloud some of the results. The U.S. really across the board went really aggressively on restaurant shutdowns. You had, as talked earlier in Europe, a number of the big countries that have shut restaurants down, but not all countries. In certain markets, they’ve stayed open as is through the whole COVID experience heretofore. What we signaled, and I think there's plenty of outside data that if you look at our largest market, which is the U.S., you've had a lot of the restaurants either completely closed or only allowed to have pickup or delivery, which is a dramatic downturn in their business. There is public data around number of transactions, which are down in the 40% to 60% depending on the segment percent rate year-on-year. I think those are good indications of the type of demand you would expect to see.

Okay. Helpful. And then secondly, as you're growing your annuity business, do you see greater opportunity in existing customers with circling the customer and adding increased solutions per account? Or do you see greater opportunity from new customers?

I think it's always the answers in both. Christophe's answer on protein would be, right, a good evidence. I mean, certainly, there are providers there who are high quality and highly concerned, who we have not developed relationships with over time that we would love to develop relationships over time. That would be on the new side. Then within our customer base, given the new sensitivity around hygiene, which we believe is here to stay for quite a while, there's going to be ample opportunity, if you will, to sell new additional programs to help them meet new consumer expectations. So I would say, it's a great chance for both. We like to have a balanced approach and have both at all times. This typically is how we build our marketing plans. So, this will also fit that well.

Hi. Good afternoon. Your slide deck mentioned the accounts receivable write-off risk was under 1% of sales in the prior downturn or in prior downturns. This downturn is different, really hitting your foodservice and hospitality customers. Can you talk kind of in general how you view their financial position and how you are thinking about the risk to collections or around bad debt?

Yes. I'll ask Dan to give his perspective, and then we can add some color to it. Thanks.

Yes. Thanks, Doug, and thanks for the question. Yes, you're right. We gave the parameter around how our collection experience and bad debt expense trended after the Great Recession. And, clearly, like you, we think that this is going to be an event of a different character. Let me just say this. I mean, Doug said upfront, and it's true. We're very confident in our financial position. We go into this experience very committed to being partners with customers that we have decades-long relationships with. That said, we are also on our guard and looking out for our own interest and for our shareholder interest. I’ll just put it this way, maybe. We will work very collaboratively with customers with the interest of helping them also assuring ultimately great collections. We have tested our bad debt experience and portfolio deterioration very, very severely. The net of it is we remain very, very confident of delivering positive free cash flow across the year.

The disadvantage of being a global business is, you see a lot of crises over time. The advantage of being a global company is, you see a lot of crises over time. So if I even go back, there's a long history, a very good partnership between the finance team and the businesses. It takes both to manage these risks. It could even be the Greek crisis. It could be things that we go through in Latin America routinely, experience we had as just referenced in 2008, 2009, and things we've gone through in Asia at different points in time. We have experience here. That doesn't mean that we are going to mitigate all the challenges either. The fact that there's going to be increased bad debt is almost a surety. The question is how well do we mitigate and manage that. I would say, we have a very capable team there.

All right. And then one of the things that you guys addressed as an opportunity at your last Investor Day was Legionella. It seems like this is an issue when you have buildings closed for some period of time and then you reopen them. So can you talk about how Legionella might factor into Institutional and lodging or maybe some other markets as we start to look at an eventual reopening?

Yes, Christophe will address this.

So the water question is becoming a bigger opportunity. For those sites, this is true in hospitals. This is true in manufacturing. This is true in hotels, because infection, in general, comes from the weakest link. So it's maybe a little bit coming back to a previous question as well. Saying that if we serve very well, the food safety risk doesn't mean the whole infection risk is reduced if we don't take care of the water cleanliness, if we don't make sure that the pest is being eliminated. That's where the comprehensive value of the company makes a huge difference for our customers going forward. The question on water is becoming more interesting and more in demand, especially in Institutional and in Healthcare. This is true for Legionella. Just to remind, it's really coming out of sprayed water, so like the cooling towers. It's also disinfecting the water from the building, which is important as well. It’s also getting the right quality of the water for any food preparation or drinks for that matter. The water opportunity in those segments will rise going forward through that period.

I wanted to get an update on the three-year efficiency initiative aimed at achieving approximately $325 million in cost savings. I'm trying to understand how this interacts with the various challenges posed by COVID. Is it possible that this target for savings might increase? Also, could you provide an update on the annual run rate of savings at the end of the quarter? Could you reiterate or update us on the additional savings you anticipate this year and perhaps next year? I just want to comprehend how this fits into your current business plans.

Yes. I would say, Andy, we went into the year with $130 million incremental savings as a consequence of the May 2020 program. We still expect to realize that. As that base changes over time, we will keep updating and let people know what's going on and how it's related to May 2020. I mean, I don't know what else. Yes, it's going to be an interesting time. There's going to be a lot of changes. We will certainly be saving more than $130 million on selling, general and administrative this year. It's going to be an absolute requirement, given the environment we're in. But a key component of our savings this year still is coming from May 2020.

Okay. Thanks.

Thank you. That wraps up our first quarter conference call. This conference call and the associated discussion and slides will be available for replay on our website. Thanks for your time and participation today and best wishes for the rest of the day.