Greetings, welcome to Ecolab's third quarter 2019 earnings release conference call. At this time, all participants will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Mike Monahan, Senior Vice President, External Relations. Mr. Monahan, you may begin.
Thank you. Hello, everyone, and welcome to Ecolab's third quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO, and Dan Schmechel, our CFO. A discussion of our results, along with our earnings release and the slides referencing the quarter's results and our outlook, are available on ecolab.com/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 the Risk Factors section in our most recent Form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release.
Starting with a brief overview of the results, pricing, new business gains, and product innovation led the third quarter sales, along with productivity improvements and cost efficiency actions, yielded the third quarter's 12% adjusted diluted earnings per share increase. As discussed in our press release, acquisition-adjusted fixed currency sales increased 2% as the Institutional and other segments show steady sales gains and more than offset a modest decline in Energy and moderately softer Industrial markets. Adjusted fixed currency operating income margins increased 140 basis points, continuing their steady improvement. Income growth was led by double-digit gains in the Industrial and Energy segments. Adjusted earnings per share increased 12% to $1.71, representing another quarter of double-digit adjusted EPS growth. Currency translation was an unfavorable $0.03 per share in the quarter. Progress continues on the spin-off of our upstream Energy business.
We continue to expect the spin-off to be completed by mid-2020. Looking ahead, we will begin rebuilding our sales momentum in the fourth quarter as the moderated delivered product cost environment has enabled us to reprioritize new business development as our sales team's primary objective. As always, we will drive our new business wins by focusing on our innovative products, sales and service expertise, and our value proposition of best results at the lowest total operating cost for customers. We will also continue driving productivity and cost efficiencies. Our digital investments are developing well, and we look for them to add new actionable insights for customers to improve their operations, increase our sales force effectiveness, and enhance our market differentiation. We narrowed our forecast for the full year 2019.
We now look for adjusted diluted earnings per share to rise 10%-12% to the $5.80-$5.90 range as price and volume gains and cost efficiency benefits more than offset the impact of moderated delivered product cost increases and business investments. Currency translation deteriorated $0.02 and is now expected to be an unfavorable $0.13 per share in 2019. Fourth quarter adjusted earnings per share are expected to be in the $1.64-$1.74 range, up 6%-13%. In summary, we expect good fourth quarter earnings momentum in 2019 to more than offset moderated delivered product costs and unfavorable currency exchange, and along with cost efficiency actions, yield 10%-12% adjusted earnings per share growth.
As we continue to make the right investments in key areas of differentiation, including product innovation and digital investments, we expect to develop superior growth this year and for the future. Now, here's Doug Baker with some comments.
Thanks, Mike. I'll just offer my take on the quarter. There's a lot to like in this quarter, and there are some areas that we're addressing. The good news is, as we leave the third quarter moving into the fourth quarter, we are in a very good position to end this year successfully, while, I'd say, importantly, building momentum as we head into 2020. The positives in Q3, well, certainly 12% adjusted EPS growth. We had very strong cash flow with a Q3 conversion rate of over 100% as we reduced inventories post our supply chain SAP rollout in North America. Year-to-date cash flow is up 29%. We also continued our strong pricing, helping drive the 140 basis point OI margin improvement Mike referenced. Our team has executed really well across the board. They continue to drive the business performance improvements.
They're also managing a North American SAP rollout, which has moved from supply chain into the commercial arena, and they're also managing a spin of upstream. All this they're doing while improving the business. We also talked that we've shifted our sales team priority focus as raw materials stabilize and some markets have softened. We have moved our sales team focus from what I'd call pricing and growth to growth and pricing, meaning growth is primary. It's not the only thing we ask them to do, but you always have to have something as number one priority, and right now, we believe it's smart to have growth as the number one priority. This shift moves this team back to what I would call their natural state, and we're seeing strong results in all of our leading indicators. Net new business is accelerating.
It was virtually flat year-on-year in Q1, up 10% in Q2, was up over 40% in Q3. We really need roughly 15% year-on-year to continue the growth trajectory that we'd like to see. At the same time, while we're accelerating our net new business, the team has continued to deliver on pricing, which excluding upstream in Q3, was up 3%. Very importantly, our customer retention has improved throughout the year as well. Our pricing efforts are not leading to declining retention trends. Finally, I feel very good about our priorities, our plan, and the execution. We got on costs early. We remain on costs. We've done a great job securing the needed pricing, as we've discussed. We've also shifted successfully to driving new business, and as I mentioned, are starting to see those results while continuing to secure pricing.
We're also driving the critical investments for sustained advantage, like digital, like SAP, like people development, and like the upstream spin. Now let me turn it back to Mike, who will open up the Q&A session.
That concludes our formal remarks. Operator, would you please begin the question and answer period?
Yes, 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 at this time, please press * one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press * two if you would 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. Thank you. Our first question comes from the line of John McNulty with BMO Capital Markets.
Yeah, good morning or good afternoon. Thanks for taking my question. With regard to the reprioritization around new business development versus price and kind of moving the volumes to the front of the queue, how quickly can you get that shift to start really working on the volumes? Also, how should we be thinking about what this means for price mix as we look to 2020 as well?
Yeah. It's a little different by business. I would say in industrial, there's usually a couple quarter lag between securing significant new business and when you start seeing it show up in the P&L. Institutional, that lag can be a bit shorter, call it a quarter and a half. There's always, it takes a little time for what I would call accelerating new business trends to show up in the growth trend and make a difference. We would expect to have what I think historically good pricing next year. We're going to enter the year with very good carry in momentum. We will continue to price in this environment. Honestly, it's about as simple as it sounds. We were late getting on pricing. Sales teams hate doing pricing. It's a contentious discussion with customers who they're trying to make like us.
This is always a hard thing to get sales teams excited and motivated around, and you've got to make a call. We rang the bell a little over a year ago on pricing. They started making very material difference as a consequence of that. We now know, given the situation, we think in raw markets and just broadly economically, it's smart to get on volume. I think what you'll see is an increasing volume trend going throughout the year, but it'll take a few quarters for you to see a material change.
Got it. No, thanks for the color. Maybe just a quick question on the industrial segment. The overall growth actually looked relatively robust considering the macro backdrop. Can you speak to the condition of the end markets that you're seeing and what that means in terms of some share gain that it looks like you may have been picking up?
Yeah. I think our industrial business, I would agree, I think it's fared pretty well. It shows up, for instance, water looking like it went from an eight to a five. We really probably think it went down two points, and this is several factors. Certainly some markets are softening, but it's not softening across the board in the industrial areas. There's a number of places where it's still quite strong, and we see those areas. The F&B business, chemical plants, commercial buildings, life sciences as examples, those markets are really unimpacted, whereas steel, auto, and paper, which I think there's a lot of noise around, and we would also say we see some of that softening there as well.
With that said, I think we view this market, if this is the conditions we're in, we think ultimately our new business efforts will overcome a lot of that softening, maybe not 100% of it, but we can still grow at a very good clip in that business. Obviously, if it gets dramatically worse, then we'll have to update our forecast, but that's not what we see right now.
Great. Thanks very much for the call.
The next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thank you, and good afternoon. Maybe you could just help us unpack the volume performance if we strip out energy and then the low margin businesses you exited. If you could just walk us through the segments and where you were happy or where you think there's more work to be done.
I don't know if I've ever had a quarter where I thought I was happy with our volume growth. This would include it, meaning we have aggressive targets that we go chase. If you unpack it, you take away paper. Paper was down this year, and in the energy segment, we probably lost 1 point total. Without those, we would be up 1 point. That's not where we need to be, which is really why this shift in emphasis. We have very good trends in pricing and other things. We know we're going to have good carry-in. We've got to get moving on adding even more share. I would point out against every one of our major competitors, we track wins and losses.
We've gained share against all of them, but you've got to go on a really major share gain strategy when you have softening markets.
If I could just ask a follow-up to that and to the pricing pivot. Are there specific new business initiatives that you're putting in place? Is it product specific or is it digital, new technology, ERP system driven? Is it just basic blocking and tackling?
Well, we always use innovation as one of the primary, if you will, means to the end, i.e., we bring additional benefit to customers, new and/or existing, and that's absolutely critical to equipping the sales team to have good success in new business. Certainly, the new digital efforts that we've had are starting to bear fruit. We're seeing it in a number of accounts in QSR, where we really led in the institutional side. We're seeing it in food retail as well. Water was one of the early adopters, and we've seen very strong efforts around there as well. With that said, there's been clear new targets established for the last four months of the year, what we're trying to achieve, what kind of momentum we're trying to drive. I think the sales teams love these initiatives. They're all over it. It's clearly tracked, clearly monitored.
It's led by Christophe Beck, our COO, and that initiative will also, we're quite confident, help us gain volume momentum as well as pricing momentum.
Thank you.
Next question is coming from the line of Gary Bisbee with Bank of America Merrill Lynch. Please proceed with your questions. Mr. Bisbee, your line is open for questions. Moving on. Our next question will be coming from the line of Manav Patnaik with Barclays.
Thank you. My first question is just also just to follow up quickly on the pricing shift. What changed between, I guess, today and the prior quarter? Is it just any backdrop that the weakness in the industrial side, or was it just maybe just a little bit more color on why that decision was made today?
Well, it wasn't really made today. It was honestly made several months ago. As we start moving this shift, it takes a little time to enact it. Manav, this is like a natural occurrence for us. Sooner or later, our natural bent is growth then pricing. What I would call is, it was a call to get back to natural state versus sort of a abnormal state where it's pricing over growth. As we look at the situation, we saw raws, if you will, stabilizing in terms of market. In fact, we had a little daylight in Q3 year-on-year, i.e., raws were slightly cheaper this year than they were a year ago in total when we net everything out.
That condition, certainly, we had forecast, we started to see that, in fact, it was true, and it takes a little time for these shifts to start bearing fruit. You got to be a little bit ahead of the curve, not behind it. There is no doubt that all the pricing actions that are in flight are going to be completed by the sales team. We continue to monitor that. I'd point out that we had still strong new business growth even when pricing was in front. We'll continue to have good pricing effort even when growth is in front.
Okay, got it. That's super helpful. Just your comments on the net new business, the acceleration from 0 to 10 to 40. Broadly, just some thoughts on how we should interpret that into growth next year, because I think you said all you need is really 15%, so that 40 sounds a standout there.
It's on a relatively small number, right, in terms of the whole P&L. If I wanted to give you a very simplistic example, if you've got a business at $100 million and it loses 5% a year in attrition, then if you want to grow at seven, you're going to need to add 12% of new business somehow. Let's pretend it only comes from net new gains in corporate accounts. We have some businesses like that. K would be like that. Really, they only sell corporate accounts. As you go through this and you start doing the math, that 12 has got to continue to grow each year at roughly a 15% rate if you want to continue to grow at seven. That's how we look at this. We measure this very closely.
We like to be more around the 20% rate so that we have some wiggle room, if you will, in our numbers. Those are the types of things that we look at because they're good forward indicators for us. As I mentioned, I think John had asked the question, it's not like an immediate show up. If we land a new contract, we will count it as new business that day. It may take us three to four months to fully install and to realize that volume. At the same time, we are counting losses the day it's announced, even though it may take four to six months for that loss to fully see itself into our P&L. We think that's important. Really, this whole number is really a measure of our large wins and losses, principally in corporate accounts.
Got it. Thank you.
The next question comes from the line of Gary Bisbee with Bank of America Merrill Lynch.
Hey, let's see if this works this time. Doug, one more cut at the revenue. There was a number of areas where the comps were actually quite a bit tougher, F&B paper being two. You talked about timing at life sciences. We know you walked away from some low margin business at institutional recently. How much of the sequential deceleration is sort of those factors that can normalize relative to actual change in the underlying trajectory, like because of weaker macro conditions or other items?
Yeah, I think in industrial, I think when you normalize, if we were going to just kind of top side this thing, you'd say there's like a two-point apparent deceleration. We still got to grow on our higher base. We would call it one point market and one point this sort of gear shift from pricing to new business. That's why we know we get on this new business. We're already starting to see the results. We know we will end up, if you will, gaining back some of that sales momentum. Now, we aren't going to be able to cover any market condition. Nobody's ever expected us to, nor will we promise that we can. If the conditions remain more or less like they are today, we think this is still a relatively good market for us to continue to perform in the fashion that we're performing.
Great. Then a quick follow-up just on pricing. You said you expect to enter 2020 still having pretty solid pricing, but obviously the comps get more difficult as we move out because you start lapping the bigger price increases you've gotten. What's reasonable to think about over the next year? Is it sort of like the 1% or so that's been the long-term average, or 1% to 2%, or any way to help us think through that? Thanks.
Yeah, I would say, it's not going to be at the current rate, which really when you strip out, as I mentioned, upstream averages up, it's a little over 2.5%. It's about the rate that we expect in the fourth quarter. It is going to slow through the year, but it will be significantly above our normalized 1%, call it almost terminal rate that we have. I think we're in a position next year where we don't forecast inflation really in our raw material base to still have benefit from pricing.
Thank you.
The next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.
Thank you, Doug. Can you just discuss the competitive dynamics in U.S. Institutional and any concern that a maybe more aggressive view on a new business development might elicit some price response from your large competitor?
Yeah, David, we haven't seen huge change in their behavior really anywhere. I would say, as we look at our wins and losses against our main institutional F&B competitor, it's four times more wins than losses. Our advantage, I think, in technology and feet on the street and the ability, honestly, to deliver great value, I think, continues to show up. The numbers that we have, we don't see it. If we look at retention, kind of X the large margin walk away situation, we have very good retention. We're not seeing it. We're not getting nickeled and dimed with small, medium accounts. Our retention's actually improved in industrial throughout the year, which is terrific given the very strong pricing performance that they've had. That's what we know.
Very good. Just on buybacks, Doug, you bought back no stock in the quarter. Is that due to more active M&A pipeline? How is the M&A pipeline today?
Yeah, we've got a large pipeline, and I've mentioned this, and we're obviously going after a number of what I'd call middle to smaller deals. I think we also have larger folks that we'd be interested in, but there you got to be pretty price disciplined. Typically, they're longer. They're companies with a history, and your ability to improve them is X, but not X times three. We need to make sure that we're going to get a return for our shareholders over any reasonable period of time. I would say, I never really want a recession, but if there's an upside and there's a recession coming, I just can't tell you what year it's going to be. It'll be a better M&A environment.
Thank you.
Next question is from the line of John Roberts with UBS. Please proceed with your question.
Hi, Doug. Thanks. In the institutional SBU, for the business that was exited, was that business that Ecolab never should have been in, or was it business that you got in and then the customers eroded in that business? I don't know if you can characterize for us the business area you're exiting.
Yeah, no, we were in that business a long time. The value equation we had was favorable. The offers that were put on the table for the customers were dramatic decreases on what I would characterize as lower margin business for us before we ever would consider meeting those deals. While it was good, it was going to be upside down if we met those bids. We chose not to do that.
We, of course, continued to try to secure the business at a much different price than it was being offered, and the customers made a choice. This has happened. This isn't the first time, I wish it would be the last. As I mentioned before, we went through a wave of this in F&B for a number of years. I would say we secured almost all of that business back. I can't really think of one that we haven't. I'm sure there is one. We've had it in institutional over years. It kind of moves by region, and in many cases, we've resecured that business as well. We've got to maintain price discipline. Selling customers for a cash loss just doesn't make any sense to us. We do not believe our cost advantage, or we have this monster cost disadvantage.
I think we just understand the cost of doing the business quite well.
Okay, post-spin, will you put the downstream energy business into the Industrial Segment? Are the margins about the same as the overall Industrial Segment currently?
Yes, downstream will end up in the industrial segment. In fact, their margins are higher.
Thank you.
The next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your questions.
Hi, guys. It's Daniel Rizzo on for Laurence. How are you?
Good.
With the pricing and the shift to growth for next year, is there a certain threshold with external factors that would kind of make you shift your policy again? Would it be a spike in oil or how do you think about if things were to change in terms of the input cost environment?
Yeah, absolutely. You can draw a scenario where it'd be smart to reprioritize again and put pricing ahead of growth. We aren't anticipating that environment, obviously, but should it happen, we could pivot quickly there.
Okay. Thank you very much.
Next question is coming from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.
Thank you. Your results in F&B continue to do pretty well on enterprise selling across Water Pest Elimination, among a few other substrates. Can you just give us an intermediate to long-term update on where these initiatives stand, where they could go in 2021, and just are there any other glaring enterprise selling opportunities within industrial comparable to F&B? Thank you.
Well, yeah, I would probably characterize it as, why don't I say within water, just because it's really water and F&B partnering very successfully. Honestly, there are a lot of legs left in that partnership. There's many customers where we may have small penetration of the combined concept, but not full enterprise, and there are others where we haven't penetrated yet at all. I would say, I think the team's done a great job, but there's still plenty of room left to go even there. With that said, if you look at the water match up with institutional, particularly in the hotel segment and with healthcare in the hospital or acute care segment, there's significant upside. With water and life sciences, as pharma continues to make sure that they create sterile boundaries, even external to their building, et cetera.
There are a number of initiatives and opportunities as we go forward. The data that we're getting and the new capabilities through digital just enhance our capability to what I would say is marry these solutions to create outsized impact for customers.
Got it. You've also been doing a lot more with products and service programs in healthcare over the last 12-18 months, including some stuff internationally. Can you just quickly walk us through the two to three key growth drivers for 2020 in both the U.S. and abroad, just given the strategy evolution? Thank you.
Yeah, look, I would say, number one, continue driving the program selling initiatives that are already underway. They continue to have success. We know long-term, that's one of the smartest strategies, and the team continues to work to pull what I would call some commoditized segments and wrap them with digital capability to create additional programs moving forward. The other, as we discussed at the investor conference that we had, is OEM solutions. A lot of this is mirroring our capability and other med tech device companies' capabilities in creating joint solutions that really gives both sides an advantage, and these can be quite sticky as well. Those would be two big initiatives that we continue to push.
We continue on Anios to push internationally in geographic moves outward using their technology where we don't want to build, if you will, a ground-up Ecolab healthcare business, and we continue to build out countries like Australia, China, et cetera, with more traditional Ecolab full service approach.
Thank you.
Our next question comes from the line of Rosemarie Morbelli with Gabelli Funds. Please proceed with your question.
Thank you. Good afternoon, everyone. Doug, looking at downstream energy, you mentioned the timing of new business startup and the timing of also maintenance. Could you give us an estimate of the impact on the downstream growth? Is that a business that you can catch up in the fourth quarter, or do you have to wait until the spring of next year because of weather?
Yeah, no. The downstream business will, we think, be much better in the fourth quarter because of the timing issues that we discussed. Mid-single digits type performance. I would say downstream is not that much different than some of the other businesses. They have been clearly all over pricing as well and have done a very good job securing pricing. It's helped them drive significant enhancement in margin because they had to rebuild margins as well as a result of raw material price inflation. They are also in a shift to make sure that they get on and have growth and pricing, but growth first as they start driving share gains, and they've got plenty of opportunities to do that.
Quickly, if you could touch on how much business overall you may have lost because of your pricing strategy, and then if you could update us on the transaction, the Holchem transaction in the U.K., where do you stand?
Well, I'll do Holchem. I think as has been announced, we have a disagreement with the antitrust authorities. Unfortunately, the power in this disagreement is asymmetrical. Just the same, we plan to challenge it through the legal channels that are available to us, but clearly it's not a positive. We just have to let that move through its course.
Customers we lost.
Yeah. Oh, customers we lost because of pricing? Aside from the conversation we just had around those 2 customers in Institutional, which is now well over a 1 year old story in terms of when we got the news. I'm sure there's a few, but not material, and the best evidence is the evidence I cited earlier, which is what we call our retention, which we measure very carefully by business. Our retention corporately is better, and it's improved throughout the year in Industrial. We don't really see that pricing has had an adverse effect on our customer base.
Thank you.
Our next question is from the line of Mike Harrison with Seaport Global Securities. Please proceed with your questions.
Hi, good afternoon. Was wondering about the water business. You mentioned some softening in autos and steel. Can you talk a little bit about how those markets were trending during the third quarter and into Q4? Were they worsening? I guess kind of the heart of my question is that autos have been weak for some time. Is it that there's shutdown activity that happened in Q3? I guess, why haven't autos looked weaker earlier in the year because they've been under some pressure for some time?
Yeah. Well, autos, I think is a well-publicized scenario. I don't think we see a situation where that turns around by any means in Q4. You might have GM as a specific customer because strike on, strike off. Aside from that, autos weakened throughout the quarter, and we would expect them to remain weak in Q4 as we go through. In terms of steel, we got more a mixed message as it goes. We've secured new business in that area, but overall, the steel business is a consequence in part because autos and other industrial is down. We don't look at that one as hopeless. That business continues to grow, and we would expect it to grow in the fourth quarter.
A question on the F&B business. Just looking for an update on the protein market. You mentioned that that market grew moderately during the quarter. Was wondering specifically if you can comment on what you're seeing related to African swine fever and the impact that that's had on protein markets.
Yeah, I don't think that's going to have a material impact on us, given most of our exposure in protein would be beef and chicken. We've seen the protein business continues to grow. It's low single digits. We would expect more of the same.
All right. Thanks very much.
The next question is from the line of PJ with Citi. Please proceed with your questions.
Good afternoon. This is Eric Petrion from PJ. Doug, your volume in the mix was flat in the quarter. How do you think that compares versus underlying industry trends?
Well, as we mentioned earlier, that's heavily influenced by energy, which was off considerably, and also paper. I think even those declines were very much in line with industry trend. You might even argue we held serve or gained share in those markets. On the balance, I think, now I'm in, I got a lot of industries to walk through. I would say, I think if you look in total, if you look at our net wins and net losses, what we think is actually going on in the markets, I would say we feel we are gaining share, but not at the rate that we want to or need to in the market environment we're in right now.
Helpful. In healthcare, your team's been innovative with product launches, including digital dashboards, predictive analytics, and core temperature fluid management. Do you think that's enough to get top-line growth higher?
Well, we're bouncing around the low- to mid-single digits right now. I think it's gonna take us a while to move out of that range. I think those things are gonna enable us to do it. As we talked in the investor conference, we need to continue, if you will, evolving the portfolio much more to growth. Some of that we do by taking things that have been commoditized and putting them in the growth category, and some it's just over time, the stuff in the growth category grows faster than the stuff not, and we start seeing a natural shift as we go.
Thank you.
The next question comes from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your questions.
Great. Guys, yeah, there's been a lot of questions on kind of the top line. I wanted to dig in a little bit more into the margin profile. If you look over the course of the year, the SG&A margin has been falling each quarter sequentially by round here from like 29, 27, this quarter about 25, and you're guiding 25% SG&A in the fourth quarter. I guess, as we look at that 25% in the quarter and then guidance for the fourth quarter, is there anything unusual in that makes that unusually low or anything, or is that kind of the way to be thinking about it as we head into 2020?
Yeah, there's no big news in there that would say makes it look artificially low. Certainly, we work on productivity routinely. We still believe there's productivity in front of us as we leverage more effectively new tools, i.e., we need to equip our teams with capabilities to enable them to manage more business successfully. We are working on those tools all the time. They're always in flight. We do not believe by any means that we're at the end of our productivity journey, but we've got to do it in a way that makes sense, i.e., can people adopt the new technology? Does it work? Does it truly enable us to continue to serve customers the right way? I think we've done a good job doing that, as evidenced by both retention, which is good, and continued decline in SG&A ratio.
Great. Thanks for that. I guess my follow-up question would be, I guess similar on the gross margin side. Obviously, there's a lot of factors that go into this. In the last couple of quarters, you're starting to see some gross margin leverage from the pricing, which is great to see. I was just wondering what the bigger puts and takes are, Doug, that you're looking at on the gross margin side. Obviously, raw materials has been the story for many, many years now. Are there other factors that come out of your cost efficiency initiatives that you've got in place, which I think were largely SG&A based? Are there other puts and takes besides the raw material complex, that could factor into your gross margin performance as you head into 2020?
Yeah. No, I think there's a number. One, we got on a lot of formulation work and what I would call is optimizing where we make what, and particularly the energy business. They weren't impacted by the SAP rollout that we had. That was really more on what I would call legacy Ecolab plants primarily. The consequence, they were liberated, they weren't frozen. You see even there in tough volume situation, good gross profit and very good OI leverage, that is both SG&A and a lot of the work in the plants, et cetera. That opportunity exists across the board. The supply chain SAP work is largely done. We got a few plants left to do, it's really not material.
Now those plants are leveraging the new tool, understanding and having more clarity about what's happening in terms of all the way through freight, but making, we do a batch process, should we be rethinking formulation structure and the rest. A lot of this work is still in front of us, and I would say greatly enhanced and enabled by the work we just did with SAP. There's also clearly work to be done on SG&A. This is why we still believe delivering double-digit EPS is really the right path, and the way to think about us going forward, because we can grow and we can also grow while obtaining leverage, not just through volume, but through efficiency work both in plants and in SG&A.
Thanks.
Thank you. We've reached the end of our question and answer session. I'll turn the floor back to Michael Monahan for closing comments.
Thank you. That wraps up our third quarter conference call. This conference call and the associated discussion and slides will be available for replay on our website. Thank you for your time and participation, and our best wishes for the rest of the day.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines at this time, and have a wonderful day.