Ecolab Inc.

Greetings and welcome to Ecolab first quarter 2020 earnings release conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference today, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Monahan. Thank you, Mr. Monahan. You may now begin.

Thank you. Hello, everyone, and welcome to Ecolab's first quarter conference call. With me today is Doug Baker, Ecolab's chairman and CEO, Christoph Fack, our chief operating officer, and Dan Schmeckel, 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 slash investor. Please take a moment to read the cautionary statements in 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 netted to 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 segments 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 25th COVID-19 webcast, we have taken a broad range of actions to protect our people and further bolstered our already strong financial position in cash flows. At the same time, we're 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, our focus on providing our strong customer base with improved results while lowering their water, energy, and other operating costs, and our huge 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. So our Q1 adjusted EPS results were better than expected. As we realize, expected business acceleration versus Q4, but COVID-19 impacts were different than we anticipated. COVID-19 did negatively impact sales, but it also drove lower expense in T&E, 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 enter 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 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 in 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. So 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 F&B, 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 D stocking 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 of Momentum, F&B, FRS, 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, and we're developing new applications for a powerful BioQOL system. Three, we're maintaining growth investments in animal health and data centers, which we had 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 talk about the benefits that we bring in good and difficult times. Now, 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 technology, Lowest use cost delivery, 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. And finally, our ESG advantages will remain significant and important. But we also believe that there's going to be new transformational opportunities as customers' and communities' expectations evolve. And 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.

Thank you. We'll now be conducting a question and answer session. We ask that you please limit yourself to one question and one brief follow-up question per caller so that others will have a chance to participate. If you'd like to ask a question today, please press star one on your telephone keypad, and a confirmation tone will indicate that your line's in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions. Thank you. Our first question is from the line of Tim Mulroney with William Blair.

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, you know, 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. And 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 surroundings. They're going to be quite sensitive to are things 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 as 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 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. And 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. And 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. So years ago, Doug, and I mean, this was years ago, I think I remember you saying that if oil ever broke 20 bucks, 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 it 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 that Nobody buys our stock because they think we'd be any good at this. And we'll hedge transactions, which are known and specific and discreet with discreet timing, but that's really the extent of it. And, you know, if we start straying there, would you 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 – You know, obviously I don't have one. You know, when it comes to oil and some of the other stuff, I would just say, you know, 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's no inventory space for this stuff, which is why it moves so radically when supply and demand moves. Now, normally supply and demand moves by like a point or two during the recessionary period. And here we've had, you know, oil fall in demand by 17% in April. I mean, it's unparalleled. So, you know, I think we're going to go watch this and understand it, but we are going to take hedge positions because we know we'll likely get it wrong over time.

Thank you. Our next question is from the line of Manav Patmia with Barclays.

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

Yeah, I mean, I would say what we've seen in April was very similar to what we expected to see. Now, your disadvantage is you didn't know what we expected. But it's along the lines that we just talked about. The businesses that look like we're going to be advantaged because of the shift from restaurants to food retail, you would expect our food retail business to have increased sales as the grocery stores are working very hard to increase hygiene standards to protect their workers and their consumers. even in environments where it's a pickup situation. And so we've certainly seen that play out in increased demand for that business. This shift also causes big changes and shifts within the food and beverage industry itself, as they've got to change pack sizes to more consumer-oriented from food service-oriented pack sizes, et cetera. And those shifts have also driven demand as has heightened hygiene for their workers, to make sure that they can continue to create a safe environment for workers and continue to operate. So I'd say, and health care is obvious, and those demands are obviously around antimicrobials in particular and hand care and the like, stuff that you would expect. That's offset somewhat by the fact that in the U.S. in particular, elective surgeries have been frozen, and so we've got part of our health care business with huge upswing in demand in part with significant downswing. With that said, the net in healthcare is a net positive as we go through. And then life sciences. So life sciences was doing well. Pre-COVID continues to do quite well. And then BioQuil, an acquisition that we made a little over a year ago, which has hydrogen peroxide technology that's basically misted, enables us to do a number of things that we couldn't do before and that are quite important right now to customers. So they're getting the experience of the technology because of unique needs, but we believe that experience is going to lead, well, we're watching it, is going to lead to permanent use of this technology as we go forward. And then on the downside, you know where restaurants are and hotel occupancy and the like. Cruise lines are all docked. They're not consuming much right now. So, you know, 30% of our business is going to be under real significant pressure, particularly in the second quarter, where you have most of these restaurants down. There will be some opening as we move through the summer. I don't think all of them in one rush. But we know the second quarter is the most acute quarter because you compound that with distributors having to reduce inventories as a result of their demand being down, et cetera. It's kind of the double – the double whack, if you will. And with this, when you have reduced demand like this, suddenly you get significant, right, fall through to profit because, you know, in this case, we're like at a 50-50, if you will, fixed variable because you can't move quickly enough on some of the variable costs. So the second quarter is going to be the quarter that gets most of the bad news, if you will, as a consequence of COVID.

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

You know, I guess, you know, we're watching what's going on around the world. So, you know, look, in the United States, you're going to have very different, I think, patterns, simply because the governors seem to have much more the steering wheel here, and they're not going to act in one fashion. And probably appropriately, they've got very different situations by state. You've got very different density in some states than others, and so I think you're going to see different reopening patterns emerge As you walk through here, we've seen what Atlanta is doing. They're moving early. They're getting criticized for it. I think moving a day late is smarter than moving a day early, honestly, in this situation. But they're doing what they're doing. And so it's not completely predictable in the U.S., but I would guess that you're going to start seeing some areas reopening and allowing restaurants to reopen. And then what I think you're going to see govern is consumer behavior. So if you go to China – And China has reopened restaurants, and restaurant volume has picked up from the low, but it's nowhere near where it was because until we have, I think, security that we know how to treat the disease, step one, and then ultimately we have a vaccine for the disease, I don't think you're going to see fear abate to a point where people revert completely back to pre-COVID norms. It wasn't dissimilar in 9-11. So if you went through 9-11, which was a fear event, travel got stopped for a period of time, reopened up within months, but it took two years for airline boardings to equal pre-9-11. Why? Because it took a while for people there to feel comfortable that probably the government had this under control going forward. I think this will be more binary in terms of if there's a vaccine, people's comfort level will move up. And I think you'll see a reversion back to mean fairly short order is my estimation. But until then, I think it's going to be a slow ramp up as people reopen, consumers become somewhat comfortable that they can do this safely, and that's just going to take time.

Thank you. Our next question is from the line of Gary Bisbee with Bank of America. Please receive your questions.

Thanks. Yeah. Hey, Doug, how do you see your role in business reopenings? There have been a number of outsourced services firms calling out, you know, the big opportunity to help with cleaning, disinfection, pests, and other things to get, whether it's a restaurant or an office building. You know, I think your pest business could benefit. Maybe there's some one-time sales of chemicals or more than they'd normally buy. Is this a real opportunity at some point over the next few quarters or – Or in the grand scheme of what you do, do you not see that as, you know, a big 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. You know, 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 expectation and real health concerns. And 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. Yeah, 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. And when they start back up, there's obviously going to have to be inventory picked 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. And then the follow-up, just how are you thinking right now about the benefit from lower raw material prices? Obviously, oil has gone way down. Are you, you know, given the challenge a lot of your customers are in, is there any thought process of sharing some of that or being, you know, accommodative on pricing for some period of time? Or are you likely to be able to flow much of that benefit through to your gross margins as you've done in past periods of lower oil prices.

Thank you. Yeah, no, I mean, our expectation is raw materials will be, you know, are going to be less this year than we had forecast going into the year for sure. And as one of the, you know, one of the reasons is oil price per year example. I would say this, you know, we're bearing a lot of costs beyond raw materials. I mean, one, just reduced volume in a plant environment never bodes well for gross margin, right? You've got a fixed asset or you've got some variable costs in manufacturing. There's also not insignificant fixed costs. And we've had to have a lot of special transportation needs because of this huge uptick in demand in sanitizers and the other things. And what we're doing is what's right for the customer as we go through this. So I don't expect this to turn into a big pricing event. I mean, fundamentally, the way that our customers are realizing reduced spend is they're not buying anything because they're shut down in many cases. And, you know, lowering their price when they're not buying anything doesn't really add to their pleasure, it just adds to our long-term pain. So that's not really where it's been going. And I think for good reason. But what we are trying to do is make sure we understand. We've been partners with some of these companies for decades. And they're going through an unbelievable trial right now. Think about the large hotel companies, small hotel companies, large restaurant groups, small restaurant groups. And so 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 stuff. 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 You know, 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.

Thank you. Our next question is from the line of David Banklater with Deutsche Bank. Please proceed with your questions.

Hi there. This is Catherine Griffin on for David. Thanks for taking my question. So first off, on the COVID update call, we had 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.

Yeah, you know, I would say our China, you know, China recovery is going to be up and down. And I think we said in March it was going to be like a negative nine. It was actually better than that. So we saw continued recovery from our business in China, both on the industrial and on the institutional side of the business. What we see in institutional, as I alluded to in a previous answer, was It's slow. It's moving. If you looked at the low point for lodging occupancy, it was certainly below 20. It's now around 35%, so it's moving up, but not at a rapid pace. Let's just say it fell faster than it's moving up. Hence, my opening comment that we expect more of a U recovery than a V recovery. And I think there's a lot of reasons for that beyond just what we're seeing in China. On the food service side, you know, you're seeing improvement, but again, it's not a snapback. In part is that China still, while they say there's, you know, no more COVID instances, they're being very cautious in terms of allowing complete freedom of the population because I think they're very wary of a double infection rate. And so this is the pattern that we're seeing, which colors the answers I gave or informs the answers I gave earlier. So, yes, China recovery still moving in the right direction. Sales are recovering in China a little faster than we said in our March 25 call. But more of the pattern is the same than different.

Great, thanks. And for my follow-up question, so you talked about the digital investments being directed in hand care and Bioquel. 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 kind of the long-term solutions you anticipate your customers might need? you know, 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 it's, you know, they're looking to just do simple solutions like add more hand sanitizer dispensers or double down on purchases of disinfectants? Or do you think that there is, you know, urgency as early as this year or next year that they might look for, you know, to invest in more advanced solutions, you know, maybe something more like what your BioQell applications would be used for?

Yeah, so Kevin, I would, I'd say, well, it's a combination of both, to be honest. So look, we're doing some work, and I'm gonna have Christoph fill this in, because he's leading the charge on the digital investment. I mean, there are near end opportunities, but we believe their 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 a long and an ongoing basis. Other areas, it's field connectivity and the like, but let me ask Christoph to speak to some of those.

Thank you, Doug, and hi, Catherine, so thanks for the question. What's good with digital is that we remain very consistent with in our focus in our investments over the past few years, and it's just gonna get accelerated now, but the direction still doesn't change. Just as a reminder, so our three big pillars in digital is first to enhance the customer value, You can think about it like a hand care compliance in a hospital, making sure that the whole health care personnel is really maximizing the protective measures that they can have with hand care products. Second is really to maximize our field impact, which is really facilitating the work of our teams. And third is to improve Our operational performance, those are the three big strategic pillars that we've declared many years ago and that we really remain focused on. And when we think in terms of alignment with what customers truly need today, well, think about 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. Well, the fact that we have the System Assurance Center, we can provide service and value even if we're not there physically. The second one is automating as well, so customer processes. Well, that helps them reduce their costs while we're not there as well. But it can be as well, so predictive analytics that we're doing. So for Legionnaire's disease, for instance, in here, well, that's reducing the risks as well for customers that truly need it now. And last but not least, compliance is mentioned. So, for instance, the hand care compliance program for hospitals that I mentioned earlier, well, in this COVID environment, this is even more useful for our customers. And to take again to 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. Our next question is from the line of John Roberts with UBS. Please proceed with your question.

Thank you. I'm glad you all sound well. Doug, some countries, Sweden, South Korea, Taiwan, have kept full-serve 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, hand care sales in particular. And so 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 RAS, 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 RAS?

Yeah, no, I mean, the lower RAS costs, we would expect to have a benefit in Q2, but it's just going to be because of volume destruction in the, you know, institutional business in particular. which is short-term but acutely focused in Q2, is going to, I mean, you know, what that does to plant overhead absorption and the rest, that's going to be much more of the story.

Okay. Thank you.

Our next question is from the line of Chris Parkinson with Credit Suisse. Please proceed with your question. 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 biological platforms? And on the former, how would you rank yourself in terms of the competitive environment? Thank you very much.

Yeah, I'll just offer a quick perspective, then ask Christoph to comment. You know, from a competitive environment, You know, I think in these periods, I think you've got to certainly watch your traditional competitors. I would say there, if anything, this typically accentuates our strength of balance sheet, financial model, kind of long-term management, and scale. But you've got to also make sure you're watching for new entrants, And maybe people enter in ways that previously didn't make much sense, but this opens the door. That's also true for us, by the way, entering, I would say, some new businesses. And then finally, you know, I think I'd ask yourself even to broaden it. I think there's a number of customers are in different places per year comment. Healthcare, I think, is an interesting question. And then maybe comment on some of the other businesses, even those who are going through the toughest times. are certainly thinking ahead already and having conversations. Christophe.

Thank you, Doug. And hi, Chris. Maybe do you comment on reactionary versus proactive, especially so in hospitals? It clearly started as a reactionary mode because they got overwhelmed with so many patients. So who came in in the hospitals and we've helped them as well with sanitizing programs that have been growing very fast. It's also helping them as well disinfecting as well their PPE, their masks, as well in a hospital that was really making sure that they could serve the most urgent needs that they have in hospitals as we've seen in media obviously over the past few weeks or months. Now it's shifting towards more proactive Interestingly enough, it's coming back to the value that we've been offering for a long time. Just as a reminder, what we do for hospitals is to help them prevent hospital-acquired infections. which is obviously very aligned with what's happening in here. So the need for those hospitals is growing, and once this tidal wave is a little bit softening for them, we see really the hospitals come back to us and really asking, how can we help them really reduce the infection risk going forward? And if we move a little bit further away from hospitals and think about hotels and restaurants, Well, it's been a bit different, obviously, because they had to waive down. We helped them really stay open as long as they could by providing them sanitation programs as well. It worked out quite well, then closed, and then it's really helping them down, thinking about how to reopen. What are the programs that they need? What are the products that they will require? We have done a lot of webinars as well where we had thousands of people as well joining to understand the background as well of COVID. How can it be dealt with? How can we live with it as well going forward? And then it's really so training the people as well, taking that time as well, this kind of downtime as well in between, train our people, serving their people, training them as well. And last but not least, Chris, it's also to provide our audit services, which is ultimately making sure that everything that we've planned together to give to them has been truly delivered and really so closing the loop as such. So kind of very aligned with the value that we've been offering so far. Thank you.

And just in your first quarter of pest elimination results, you mentioned difficulties accessing customers for service, which I imagine is still ongoing. But do you ultimately believe pests will merge into one of the other kind of megatrends that you're seeing across water, hygiene, disinfectants, et cetera, just given the disease avoidance component? Just wanted to hear what you're getting from your customers and how you see the global opportunity emerging versus the versus let's say 19 in prior years. Thank you.

Yeah, I'll quick answer. So the pest business, yeah, I mean, the access reference was fundamentally some of the buildings are just closed. And so that's created some access challenges. They're short term, you know, that will abate. But 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.

Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.

Thank you and good afternoon, everyone. You know, maybe you could just talk a little bit about, you know, where you saw the very strong results in the first quarter. Do you have a sense of, you know, we obviously have lots of stories across the universe of products being hoarded and so forth. Was there anything maybe beyond hand sanitizer that you guys sell to customers that you think might have been built up substantially?

Yeah. Well, I'd say a couple of things. You know, 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 in the other businesses were 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 sanitizer, 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 the 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. The real story is consumption has jacked up dramatically in these areas.

And then maybe if I could just ask on the market share opportunity, you know, Are there things that are being done differently as you go after, particularly maybe some of the large potential customers that you just haven't made inroads with over the years? Are you getting involved directly, Doug, or what sort of are you doing, particularly given, I would assume, with social distancing and everything, you can't have your sales folks doing much other than these webinars. So how are you trying to make this a little bit more personal and maybe get some of that business that you've always wanted?

Yeah, we're certainly not following the old rule where we would blank them with an army of people. Yeah, but, you know, look, we're doing videos. We're doing other ways to get in front of customers. Yeah, certainly executives are doing some door opening. But by and large, we've got a great corporate account team. And what we've learned over the years is these environments open doors that have been hard to open in the past. And there are opportunities where some of our technology maybe can fill a need that they now have. They can understand and experience us in real life, and we can prove that what we're saying is actually true. And we have several instances of that going on in large health care customers, quite honestly, but also in others. And I'll ask Christoph to add a little color here, too.

Thank you, Doug. Well, our philosophy is really to keep in mind that customers will remember how we dealt with them during difficult times, and that's true for our existing customers. But also, when we look at the market more broadly, well, the strength of our company gets accentuated, and the weakness is of others, too. So we have customers who have been working with other companies in that meantime as well, so recognizing that they don't get what they're looking for with some of their current partners and comes very naturally to us, which is a very good thing. So we obviously help them with new programs. We're in a position where we can provide a very comprehensive program, where it's obviously cleaning and sanitation, can be infection prevention, can be pest elimination, can be water safety as well, all the things that the company can provide. And last but not least, two elements on one hand, where we can supply large quantities that they need, as we just discussed. Those needs of sanitizing products go up and require capacity, so to do that, We have it to a certain extent. It's not unlimited, but we could provide much more. And last but not least is the digital capabilities that we have that can bring it all together and 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.

Our next question is from the line of John McNulty with BMO. Please receive your question.

Yeah, 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, it's certainly not going through the shutdown scenarios that you're seeing in the institutional side. So it has that. I think what we sat in some of the transcripts that we released this morning or later on this morning, was we expected an industrial to be fairly resilient, you know, equal to or modestly below last year in total. And so 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. Christoph, why don't you talk a bit about how you see it?

Yeah, 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 and beverage, well, is growing nicely, has been a very strong business before COVID, by the way, with very good programs, very nice new business generation as well. And the demand, so has just grown, not only because people need more consumer goods, But those consumer goods companies so need as well more sanitizing programs to make sure that they can keep operating as we read in the newspaper, obviously. So F&B is gonna keep humming. The whole water business, As we've mentioned, so we felt some demand slow down in Q1. That's going to continue in Q2 to a certain extent and then come back second half. And as mentioned, so 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 there's also what we do for refineries that is stable, so no matter what out there. And paper, interesting business in that situation where obviously e-commerce goes up and the whole towels, toilet paper, for whatever interesting reason, so 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, 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, you know, fixed costs are around, you know, the 50% level, particularly early because you don't have time, if you will. You know, there are costs that are theoretically variable and they're variable over time, but they're not variable on day one. And so thinking particularly in Q2 around a 50-50 is probably the better way to think about it.

Thank you. Our next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your questions.

Thanks. Good afternoon. Just kind of following up on that, you know, 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.

Well, I think the thought process, I'm going to ask all Ecolab management to plug their ears for this comment. We purposely took capital down aggressively, but as I mentioned, while protecting digital investments, antimicrobial investments, and other investments. And we took it down aggressively because it's easier to add it back in than it is to go for double cuts. And the earlier you do this work, the better off you are. So we certainly would have room in our estimation. If there are great return ideas, we're going to learn things, as I mentioned before. And I imagine part of that learning is going to be where we could maybe invest some smart money early for outsized returns long term. And we have certainly kept some capital at bay to go do that. So my expectation would be that if it moves in any one direction from here, it will probably move up, not down.

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

Yeah, well, then again, it depends on what it is, but back to the things that we're quite confident in around antimicrobial program development, digital, both, you know, 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. And I would argue, we think it's even more important now with COVID. So all that stuff remains. And what we're, what we're working to do, you know, look, you could go and try to say, my goal is to make 2020 as good as possible. And that's going to be our, you know, our overarching view for our business in our situation. we believe as a team, and we're all like locked in arm on this, that that is not the right answer. The right answer is to manage 2020 responsibly and intelligently, but really with a mind on 21, 22, 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, and we have the ability to do that given the resiliency of our model and, frankly, our balance sheet and cash position. And as a consequence, we're going to allow time to help answer some of these things so we know how to invest intelligently. We know how to reshape businesses that need to get reshaped intelligently. We're just going to make, I think, moves once instead of multiple times. And organizations don't like multiple upsets. And so that's the tack we're taking. Q2, I could care less about, to be honest. It is, you know, we'll make money, but I don't care. You know, spending time on making it look less bad seems like a waste of time. It's a 13-week period. What we want our team focused on is really all the stuff we've been talking about. The investments Christophe's been talking about around digital connectivity and all that. The new antimicrobial capacity and ideas that we have. How to leverage Bioquel. How do we develop comprehensive programs for reopening and ongoing behavior for clients who need new stuff, et cetera. That's really where we think the money is long term for and how you create value for customers and communities. And that's how you create value for shareholders. And that's the stuff we're all over.

Thank you. The next question comes from the line of Lawrence Alexander with Jefferies. Please proceed with your questions.

Hi, guys. Excuse me. Stan was on for Lawrence. 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 is already lean. I was just wondering how much drawdown can actually occur.

Well, the inventory drawdown we're talking about is in, you know, let's just pick food service distributors. Even, you know, I don't know exactly where it stood, but let's call it normal. But what was normal is now abnormal. high because their demand has fallen dramatically as a consequence of all the restaurants being temporary closed. So what was normal became too much inventory for them. I mean, just the machine models that will be driven are based on consumption and consumption going down is going to make inventory look like it's gone up. So they're just not going to, they're not buying, they are shipping more than they're buying. And they're shipping a lot less than they used to.

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. How is it different from say what you were introducing say six months ago or right before this started?

Well, I mean a great example is driven Christoph and team with huge assists from supply chain and everything else is, look, we ran out of capacity in our traditional hand sanitizer. And 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, you know, what I would call hand sanitizer 2.0 views of how that evolves from here. So 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. So those are examples. Around the world, we had a lot of our teams step up in very unique forms around antimicrobials, forms we didn't sell before. Maybe were sold by others, but in small amounts. and they came up with ways of meeting consumer or customer demand that we really didn't have that capability as early as January. And so 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 and 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.

Our next question is from the line of Rosemary Morbelli with G-Research. Please proceed with your questions.

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 Apogee? Are they going to take advantage of the situation in order to change something?

Well, I mean, the way the agreement is written is even if they wanted to, they couldn't. You know, our agreement's our agreement. Yeah, we believe still that this will conclude successfully within the second quarter.

All right, thanks. And then on the F&B, which was very strong, given the impact of some meatpacking facilities shutting down, Is that, do you think, going to impact that particular business, particularly in the U.S.?

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

Bonjour, Rosemary. So maybe a comment on F&B. So 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 a major part of F&B. That's one that we're contemplating more for the future, but it's not big right now. And on the other hand, those customers need more sanitizing programs that we can offer. So that's all good news, actually, for F&B.

Okay. And 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?

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. And the interest of customers to be connected is growing. especially in situations where we can't get to the customer, well, this is a good argument to get connected in order to provide a remote service. And as I mentioned before, so automation is helping customers reduce their costs. Well, this is something that we're accelerating because they will need it even more in the next few months, two quarters, whatever happens down the road. Customers will need some savings in their total operating costs, and they will be ready to invest more in our digital technology, and that's why we're ramping up. So here, our speed of progress, we're not changing the direction at all.

Thank you.

Our next question is from one of PJ's. You've got it with Citi. Please proceed with your questions.

Hi. This is Eric Petrione for PJ. Doug, I wanted to ask, how do you see the magnitude of sales decline in US and Europe compared to China? I'm guessing there's some differences due to the extent of stay-at-home orders, but any thoughts directionally would be helpful, particularly in institutional?

Well, I mean, you know, the situations are, quite different in terms of development. And frankly, Europe didn't act in a unified fashion. You had different countries, because of disease progress at different points in time too, act in different ways at different points in time. So there's no one answer really 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, et cetera. U.S., really across the board, went really aggressively on a restaurant shutdown. You had, as talked earlier in Europe, a number of the big countries have shut restaurants down, but not all countries. And in certain markets, they've stayed open, as is through the whole COVID experience. heretofore. So there's not, I think, one model. What we've signaled, and I think there's plenty of outside data, that if you look at our largest market, which is the US, 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. And there's public data around you know, number of transactions, you know, which are down in the 40 to 60%, depending on the segment, percent rate year on year. And I think those are good indications of the type of demand you would expect to see.

That's helpful. And then secondly, as you're growing your annuity business, do you see greater opportunity in existing customers with circling the customer and you know, adding increased solutions per count, or do you see greater opportunity from new customers?

Well, I think it's always the answers in both. And, you know, Christoph's answer on protein would be, right, 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. And 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. That's typically how we build our marketing plans, and so this will also fit that well.

Thank you. The next question is from the line of Mike Harrison with Seaport Global. Please proceed with your questions.

Hi. Good afternoon. Your slide deck mentions the accounts receivable write-off risk was under a percent of sales in the prior downturn or in prior downturns. This downturn is different, really, really hitting your food service 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?

Yeah, 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. So, yeah, 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, you know, a different character. So let me just say this. I mean, Doug said up front, and it's true, we're very confident in our financial position. We go into this experience very committed to be partners with customers that we have decades-long relationships with. You know, 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, and the net of it is we remain very, very confident of delivering positive free cash flow across the year.

And I would add the disadvantage of being a global businesses, you see a lot of crises over time. And 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 of very good partnership between the finance team and the businesses and it takes both to manage these risks. So it could even be the Greek Greek crisis, It could be things that we go through in Latin America routinely, experience we had as just referenced in 08, 09, things that 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. So the fact that there's going to be increased bad debt is almost a surety. And then it's a question of how well do we mitigate and manage that And 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? Yeah, Christophe addresses.

So the water question is becoming a bigger opportunity. So for those sites, this is true in hospitals. This is true in manufacturing. This is true in hotels because infection in general will come from the weakest link. So it's maybe a little bit coming back to a previous question as well, so saying that if we serve very well, the food safety risk doesn't mean that 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. So that's where the comprehensive value of the company makes a huge difference for our customers going forward. So the question on water is becoming more interesting and more in demand, especially so in institutional and in healthcare. This is true for Legionella. Just to remind you, it's really coming out of water, so like the cooling towers, but it's also disinfecting the water from the building, which is important as well. And it's also getting the right quality of the water for any food preparation or drinks, for that matter, as such. So the water opportunity in those segments will rise going forward through that period.

Thank you.

Our final question today is from the line of Andy Whitman with Baird. Please proceed with your question.

Great, thanks. I wanted to get an update, I guess, on the three-year efficiency initiative where you guys were planning on addressing about $325 million of cost savings and just trying to understand how that gets addressed with all the other complications of COVID. Does that number go up in terms of your target savings? And really, could you just give us an update of the annual run rate of savings maybe that you ended the quarter at? Can you reiterate or update us on the incremental savings that you expect to see this year and maybe next year? I just want to understand how that's factoring into your business plans today.

Yeah, I would say, Andy, we went into the year with $130 million incremental savings as a consequence of the A2020 program. We still expect to realize that, you know, as that base changes over time, we will keep updating and let people know what's going on and how it's related to A2020. Right, I mean, I don't know what else. Yeah, 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 SG&A 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. At this time, we've come to the end of our question and answer session, and I'll turn the floor back over to Mike Monahan for closing comments.

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.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.