Greetings, welcome to Ecolab's second quarter 2019 earnings release. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone 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 your host, Mike Monahan, Senior Vice President, External Relations. Mr. Monahan, you may now begin.
Thank you. Hello, everyone, welcome to Ecolab's second 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. Actual results could differ materially from those projected. Factors that could cause actual results to differ are discussed under Risk Factors section in our most recent Form 10-K and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release.
Starting with a brief overview of the results, continued good sales growth and strong margin expansion drove Ecolab's double-digit earnings per share growth in the second quarter. Pricing, new business gains, and product innovation led to sales and operating income growth, which along with cost efficiency actions, yielded the second quarter's 12% adjusted diluted earnings per share increase. As discussed in our press release, acquisition-adjusted fixed currency sales increased 4% as the industrial and other segments both showed strong sales gains. We realized improved growth from the institutional segment and a modest gain from energy. Adjusted fixed currency operating income margins increased 120 basis points, continuing the good accelerations shown throughout 2018 and into 2019. Growth was led by double-digit gains in the industrial and other segments.
Adjusted earnings per share increased 12% to $1.42, representing another quarter of double-digit adjusted EPS growth. Currency translation was an unfavorable $0.05 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. We continue to work aggressively to drive our growth, winning new business through our innovative new products and sales and service expertise, as well as driving pricing, productivity, and cost efficiencies to grow our top and bottom lines at improved rates across all of our segments. Our digital investments are developing well, and we look for them to add an expanding range of new actionable insights for customers to improve their operations, enhance their experience working with us, and increase our sales force effectiveness.
We continue to expect consolidated 2019 adjusted diluted earnings per share to rise 10%-14% to the $5.80-$6 range as volume and price gains and cost efficiency benefits more than offset the impact of moderated delivered product cost increases and business investments. Currency translation is expected to be an unfavorable $0.11 per share in 2019. Third quarter adjusted diluted earnings per share are expected to be in the $1.65-$1.75 range, up 8%-14%. In summary, we expect continued good top-line momentum in 2019, which should more than offset moderated delivered product costs and unfavorable currency exchange, and along with cost efficiency actions, yield 10%-14% adjusted diluted earnings per share growth. We continue to make the right investments in the key areas for differentiation, including product innovation and digital investments, to develop superior growth this year and for the future.
Now, here's Doug Baker with some comments.
Thanks, Mike, and hello. It was a very solid quarter, adjusted EPS up 12% versus year ago. We had a number of standout performances led by water at 8% organic, life sciences, which was up 43%, but importantly 14% organic, F&B up 9%, 5% organic, and pest 7% organic. We also saw a solid improvement in our institutional and healthcare businesses. Continued strong pricing work, new business efforts led by innovation, all helped drive a 14% improvement in operating income, which reflects a 120 basis point improvement in our OI ratio at fixed currency. This is delivered importantly while executing the key final steps in our U.S. SAP rollout, which is now largely behind us. As we sit here today, we feel we're in a very good position. We've got significant growth opportunities. Our teams are focused on driving new business and having success.
Margins are expanding via pricing and cost-saving efforts. All of our initiatives have legs. They're early. As a result, I remain quite confident we'll meet our dual objectives of delivering the year and importantly exiting with great momentum. With that, I'll turn it back to Mike.
Thanks, Doug. That concludes our formal remarks. As a final note, before we start Q&A, we plan to hold our 2019 Investor Day on Thursday, September 5. If you have any questions, please contact my office. 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. To ask a question today, please press star one on your telephone keypad, and a confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants that are 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 Dan Dolev with Nomura. Please proceed with your questions.
Hey, guys. Thank you so much for taking my question. Looks like a great quarter when it comes to the cost control, et cetera. It looks like you're guiding your gross margin up by 50 basis points for the year. Two questions here. A, how much confidence do you have in that increase in the guide, Doug? The second question is, if I think about sort of the EPS impact for this, it's north of, I think, $0.10 potentially. You do have some interest savings, maybe a little bit more shares. Why not take up the EPS guidance? This seems quite conservative. Thank you.
Well, I guess from the first question on gross margin, we feel good about our ability to continue to drive improvements in gross margin. Q2 reported had a negative year-over-year gross margin, not significant. That was really driven fundamentally by the fact that we just produced less in that quarter. That was taking down inventories as we had a successful SAP rollout. We built them in the first quarter and actually in Q4, we really reduced inventories really dramatically, four days in Q2 versus Q1. We also had lower sales in our WellChem business. That's really the sum total of why you didn't see a little daylight between gross margin this year versus last year. We see raws holding, getting marginally better.
Pricing continued, we have a good deal of confidence that we'll see improvement for the year in gross margin, estimating call it around 50 basis points, plus minus for the year. Your question, we've got pluses and minuses in the year. We always do. You identified a couple. Interest income is a plus versus what we expected. Raw materials are a minus plus as we sit here today. Of course, that can change. As we look, it'll be a minor plus versus our plan. You've got volume negative really just in the upstream business and really principally in WellChem. That's the negative. They sort of neutralize each other. Certainly some of the margin increase is just a function of a little lower sales as a consequence of WellChem volume coming down, which by itself is a lower margin, too.
I think we feel we have a very balanced outlook. We're continuing very significant investments in the business. We are undertaking and finalizing SAP. The high-risk stuff is all behind us. 100% of the U.S. supply chain is on it now, well, the key parts. We feel like we're in very good shape in a number of areas, and we're forecasting midpoint like at 12%. It's a good year, and importantly, we feel we'll have very good momentum exiting the year.
Great. Excellent results. Thanks again.
Thank you. Our next question is from the line of Gary Bisbee with Bank of America. Please proceed with your question.
Hey, guys. Good afternoon. Doug, as we exited last year, the sales momentum had built, and I think the expectation was that that momentum would continue, yet things have slowed a bit year to date. I realize energy's a big component of that, and I guess to a certain extent, in institutional, you've walked away from some low-margin business. How are you thinking about sales momentum overall? Is this 4% or 5% type of number the last two quarters, is that pretty good number to think about going forward? Is there a case that there could be some acceleration from here in the back half of the year? Thanks.
Well, I think you touched on the two issues. One is Upstream sales are softer than expected and softer than last year, and Institutional losses. If you exclude the Upstream business, we have 6% sales, 5% organic, and that it would include the Institutional losses this year. I think underneath, we feel good. We're growing organically, water at 8%. I highlighted a number of standout divisions, and I think this 5 organic would easily be six with the normalized losses in Institutional, which we will see beginning first quarter of next year. I think we're in good shape there. We continue to drive pricing at the same time and manage a number of other initiatives. I don't think there's ever any satisfaction here with whatever the print is on our sales number.
We always want another point or another two. I don't believe that's an issue at this point in time. Importantly, the net new business results are accelerating, particularly in institutional, which is the best leading indicator we have of future results.
Great. Thanks. Just a quick follow-up. How are you seeing the macro, thinking about the macro these days? A lot of headlines about slowing in China. Obviously, Europe remains relatively weak. Is that having much impact on the trending in revenue, or has it not changed that much from your vantage point? Thank you.
Yeah, I agree with the headlines. We see some of it in China, too. For the year, we're estimating mid to upper single-digit growth in China. China's size, it's $0.5 billion, so it's not going to have a huge seesaw effect on our overall results. Yeah, I don't think the economy is hitting our results right now. There's significant share in front of us. We can continue to drive it. There are economic conditions, obviously, that can impact us. We're not bulletproof, but we tend to perform better than most in poor economic times. At this point in time, I wouldn't blame the economy. I think all in all, we're doing what we need to do to continue to push sales and push pricing and the other things forward. I think the environment's favorable enough to allow us to do that.
Great. Thank you.
The next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your questions. Mr. Mulrooney, your line is open for questions.
Sorry about that. Good afternoon, Doug. The performance in your water business has been outstanding over the last, call it, four quarters or a little more maybe. I know the strong organic growth is a combination of many different factors, in terms of share gains, if you look at the light business and the heavy business, you look at the different geographies, can you talk a little bit about where your product innovation is really having an impact with respect to new business wins, et cetera?
Yeah. There have been a number of areas. Obviously, as you just highlighted, the water business is strong across many fronts, which is one of the secrets. Its particular strength recently is an initiative that we had really coupling what I would call our food safety hygiene business with water, particularly in the food and beverage area. We've had a number of just huge wins in that area because there's real synergy when you combine the two. We have a unique ability to do and deliver value in that way versus competition. We have significant competitive advantage, i.e., we can bring outsized value to customers that others can't. As a result, we've seen dramatic share wins there. This isn't the only area that we can do that.
We're now taking it into some core parts of the institutional arena, where we also believe the combination can have significant impact as we move forward. The fundamental business, how they're executing, how we're looking at leveraging 3D TRASAR, how we've digitized much of the business and gives us much more visibility, and in turn allows us to do much more for customers. All these things are helping drive share gains.
Okay. That's helpful. Thanks. My second question on your digital business. Are there any quantifiable metrics that you could share with us with respect to your digital innovation efforts to give us a better idea how the program's moving along, maybe in terms of the number of users today or pilot programs in the field, or data scientists on staff? Anything you can point to say, "Hey, we're in a different place than we were two years ago.
Well, we certainly are. I would say, a couple of years ago, we probably tripled sales that we call digitally enabled over the last couple of years. We've had a bunch of sizable wins this year as the technology and the investments that we've been making over the last few years are now bearing fruit because they're marketable, if you will. What we will do is spend real time in the investor day meeting that we have coming up in September, quantifying and discussing this in more detail. That'll obviously be webcast. Even those who can't make it in person can certainly hear. We are working and developing. We have a number of internal metrics that we've been refining. What we want to do is make sure we have our investors, too, i.e., the ones that we think are best indications of leading wins and leading results.
We've been doing a lot of work there. Certainly it's digitally enabled sales. It is number of people on hand, but it's number of units that we're touching, type of information that we're pulling, et cetera. All those things are moving in the right direction. We feel good about the efforts, but this is an area where you can't move fast enough. I think the more we learn, the more we know we have to learn, and also the better we feel about the upside potential this technology represents for our ability to make a difference with our customers. It's all good, but we're going to spend some real time on it in September.
Got it. Thank you.
Our next question is from the line of Manav Patnaik with Barclays. Please proceed with your questions.
Thank you. Good afternoon. Doug, obviously your sales pipeline today, I think gives you confidence that the macro environment that everyone's worried about maybe doesn't impact in the near to medium term. I guess, a couple of years ago when GDP was in that one to two range, your top line wasn't as fast. Is there something, I guess, the changes made over that period of time to date, does that give you more confidence that you'd probably be able to outpace that with your sales pipeline the way it's executed the last two years?
The only safe answer is, look, I think we've done a number of things to further strengthen competitive advantage. The digital conversation that we just talked in that area is certainly one of the areas. With that said, and I mentioned this, we're not bulletproof. If the economy drops dramatically, it's going to impact us. I don't believe it pulls us negative and rarely has it. Even if you go back to the 2008, 2009 episodes, we kept our nose above water, albeit barely, during that period of time. We do a good job during the downturns.
A lot of it is the nature of what we sell, how we go to market, the trade we ask from customers, i.e., invest in our technology, and you're going to get 2 and 3x back in returns, is a very effective story, even in difficult times. I don't want to say that it's not going to have any impact. That's not our history. I think it's a muted impact versus other companies.
Okay, got it. That's fair. Then just on the margin side, obviously the guidance implies that second half margins will have kind of an outsized period. Assuming raw material costs are in check or as expected, should we expect next year to have kind of a similar showing on the margin side, or are there other moving pieces we should be considering?
Yeah, I always get a little wary of talking about the next year so early in this year. I guess what we've alluded to, once we introduce the Accelerate cost savings initiative, there are conversations. If you read back, we did indicate if we normally run it, call it a 40-50 basis point improvement, Accelerate should be additive to that. We acknowledge that. This year, we had expect OI margins to create over 100 basis points. All things being equal, I don't think it's a one-year phenomenon, but there's a lot that I don't know about next year, i.e., FX, raw materials, economic environment, et cetera. I'm a little wary of coming out too strongly on that.
What we're working hard to do is set up the scenario where that's the type of capability we have from a delivery standpoint, i.e., when I referenced in my upfront comments, leaving the year with momentum. We want both top line and margin momentum as we leave the year, because then you have a lot of tools to deal with whatever the environment's going to be.
Got it. All right. Thank you, Doug.
Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your questions.
Good afternoon. I guess two questions. One, could you give us what the sort of longer-term run rate and then the recent growth rate in the RemainCo energy, the piece that you're keeping, so we can think about what a benchmark is for the next few years? Secondly, from where you sit now, is there a way to leverage the digital platforms into healthcare to accelerate the business there? How has your thinking evolved around the need for scale in that business to improve the top-line growth?
I'll just touch on healthcare first. The healthcare team's been one of our leaders in digital innovation in their business and already has significant sales. We have a really, I think, the best-in-class hand hygiene monitoring system for acute care. Adoption rate continues to pick up and move forward there. We've got great technology in monitoring and measuring our ability to knock down healthcare acquired infections, which is a big and important measurement. There are a number of areas where there's been real innovation, and I think the team, as they become more aware of capabilities, are starting to drive this to other parts of the program. Our healthcare business in the quarter was 4%, 3% organic. It was 6% organic in Europe and double digit in other regions. North America, U.S. in particular, was flat.
I think what the team's doing well is they're identifying where they have really strong growth opportunities, medium and long term, and they're increasing their focus on those areas and getting after them. That includes some of the digital efforts that I spoke to. The other question you had around downstream. There are three components to our energy business today. There's oil field chemicals, there's WellChem. Those two comprise upstream. That's what's being spun, and downstream is remaining with the company and being folded into the industrial businesses. It'll be still a standalone business, but it will report up into the industrial group. The downstream business is about $1 billion in size. It grew last year at mid-single digits. It grew same in Q2. It's expanding margins this year around 200% as its pricing is catching up to raw materials this year as well.
It's well above average in terms of OI margin for the corporation. Great return on capital. It's a very similar business to our other industrial businesses. The mid-single digit is sort of what we expect out of that business when we're executing well, and we've got advantage technology there. We have leading share, and we continue to gain share in the market with that business.
Thank you.
Our next question is coming from the line of John Roberts with UBS. Please proceed with your question.
Thank you, and nice quarter. Is it fair to think about the pest business, Pest Elimination, as a leading indicator for the Institutional segment in that pest is a little bit more discretionary, so the fact that it's performing so strong for so long, it argues well for the momentum in the Institutional business?
I would say the pest business, look, the largest component will be in institutional, but it's got a fairly sizable share in industrial too. What's similar about the two businesses is execution matters quite a bit. What the pest team has really done over the last, I'll call it five, six years, is stepped up their execution considerably. We went through a few years, you may recall, where it was low single digits. Everybody was kind of, "What's wrong with pest?" We put it into the shop, it came out, it's really done incredibly well, growing at high single digit organic growth rates for really several years now in a row. I don't know if it's a perfect proxy or not. I would say our institutional business, I am not worried about it from a long-term standpoint. Do I wish it was growing faster this year? Yes.
That would align me with every member of the institutional team. With that said, I think they're doing exactly what they need to do. They're driving sales, they're driving innovation and driving execution, particularly in Europe. We're seeing positive signs. Net business is up double digit in institutional. The innovation focus and the execution focus is starting to show results in Europe, albeit slowly. We expect Europe to improve, too. It's the second-largest institutional business we have in the world. We need to get that thing moving. We still have such significant upside in this business. It can be product penetration in the more developed markets. We have new water opportunities in this business, which I alluded to, but also ones that don't really involve Nalco Water per se, but are significant, we think, upside potential for the business. We have sizable share and execution opportunities globally.
We look at this, and we talked about being on track to exit the year. I'll remind everybody, on 12/31, I believe we're going to be at a 4%-5% run rate in that business as the new business continues to kick in, and most importantly, as the loss business is lapped. All the fundamentals point to that direction. We're just asking the team to keep doing what they're doing. We believe time heals this thing, and that we're going to be in a very good shape moving into 2020.
Then secondly, at the National Restaurant Association meeting, you previewed a lot of digital activities over in the institutional segment. Is the industrial segment as rich in digital opportunities? Obviously, the NRA show is focused towards the institutional market, so we didn't talk about industrial there. I don't know if you can give us a perception of how balanced the digital effort is across the two.
I'd say if anything, the institutional side has been playing catch up to the industrial side. We started a lot of this work in Nalco Water in particular, part because we had a head start with the acquired technology, 3D TRASAR, which was connected to our system assurance center in Pune, India. As we continued to develop that technology, develop our capabilities, that was the first place that we really used that as a tip of the spear for our digital innovation, because we had knowledge there that we could go leverage. We've taken a lot of the learnings there, and that's really the base of knowledge that we're applying in other businesses, and then obviously customizing it for the challenges at hand.
If anything, and I think you'll see that clearly in September, we have huge, significant innovations there, many of which are being commercialized right now, that we're quite excited about, just like we do on the institutional side.
Okay. Thank you.
Our next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you. Doug, just on pricing, given some raws are now flattening out coming down, is there some potential for your pricing to also decelerate in the back half of the year?
We don't expect it to decelerate in the back half of this year. Obviously, if you get significant raw material give-ups, it does have an impact on our ability to get pricing. We don't typically go negative on pricing, as you've watched over the years, and we don't expect to in the future. For this year, we expect to have strong pricing throughout the balance of the year.
Very good. With the SAP implementation done, what do you expect the tailwinds to be for you guys from that fully in place now?
Well, as I said, we've got still some work to be done and a couple of divisions to bring on, but the big divisions and the big risk is really what I would consider behind us, not in front of us. This is kind of the most mention we've had in a quarter, mostly because we don't have any negative to tell you, and we're largely done. Look, there's a number of things when you go through this. One, we know we had increased costs during implementation. Some of these are starting to come out, but there's more that we've got to go get out. You have to shift production. You have to build inventory. You have a lot more intercompany freight than you do when you're not doing this. You have extra shipments because your service levels are naturally impacted as a consequence of this significant shift.
Our product supply team, I thought did a heck of a job managing through this, but you can't say it didn't have any negative consequences. We know it did. We know we're going to see some margin come back as we go through this. Most importantly, it's the visibility that it gives us going forward. The reason to make this investment isn't just defense, it's also offense. Our ability to look at our business, understand trends, do a better job managing things like freight, things like customer delivery, do a better job delivering and do it at less money, all of which is even more important today given the escalation in freight pricing that we've seen the last few years. I think it's going to have a number of benefits as we go forward.
Of course, we build that into our forecast, but it's these kind of cost savings opportunities that we want to continue to build because these are the levers that we want to have to manage through whatever 2020 throws our way. If it's a similar environment as this year, we're in perfect shape. If it's even worse, we're in good or decent shape, and that's the type of situation we try to put ourselves in.
Thank you very much.
The next question is from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thank you very much. Doug, just if I could ask you for a little more detail on institutional. Last quarter, we talked about there were some customer inventory issues that you thought would reset over 2Q and 3Q. Couldn't exactly tell the timing. If you could just update us on where we stand on that, it would be great.
Yeah. We got some of it back in the second quarter. We would expect some more coming back in the third and fourth. I expect this business really to kind of bounce around this 3% level for the balance of the year. It's a little better than that if you adjust for losses and stuff like that. At that level, it is very easy for us to get to the 4%-5% exit rate that I've talked about. That's what we see, and some of that is inventory naturally coming back as it does.
That actually gets me to my question for Dan, which is just looking at the cash flow from operations for the first six months year-over-year is up quite nicely and ahead of the net income gain. There was some conversation about the inventory builds around SAP and so forth. Maybe you can just give us a sense of how working capital should trend in the back half of the year and how we should be thinking about overall free cash flow for the year.
Sure. Thank you. You're right. When we were on the first quarter call, taking questions about what was a relatively weak, at least year-over-year cash flow performance. Clearly, that's flipped in the second quarter as we expected it to and communicated that it would. Year-over-year, a big part of that is improvement in working capital trends and inventory in particular. If you look at the second quarter last year, as Doug indicated, we were really building inventories in anticipation, but also sort of as security for the SAP go live. Clearly, we flipped that, and in year-over-year comparison, inventory is significantly favorable to cash flow. As in fairness is accounts receivable and AP. It was all in all a very strong quarter for cash flow.
If you look over the full year, I guess I would continue to say what I said last time, which is, there continue to be opportunities to improve working capital performance somewhat. We expect inventory balances to come down. If you drop all the way down to year-to-date free cash flow, the metric that I focus on is where you started, which is we expect to be delivering very strong free cash flow, something like 90% conversion of net income. That will be dependent, of course, on other activities that we take. That's the number that I would focus on for the full year. Great quarter. Feel good about our position to deliver strong free cash flow for the full year in line with business results. Okay?
Thank you very much.
The next question is from the line of Jeff Zekauskas with JP Morgan. Please proceed with your question.
Thanks very much. On your consolidated income statement, your product and equipment sales were up 1% year-over-year, and your service and lease sales were up 6%. Why was product and equipment so slow and service and lease growing so quickly?
Yeah. The product was really a consequence of WellChem, because WellChem doesn't really have service component per se. As a consequence, when it's down, it has an outsized impact on the product component. I will also say, and I'll probably get kicked by my CFO and others, we're not big fans of this product service split internally. We manage and look at the business in different ways because we don't believe it's the best indicator. Dan didn't create this, you'll also remind me. It was foisted upon us, we don't believe it's the best way to go look. The issue you're talking about was really driven by WellChem volume being down, which distorts the picture.
It's also the case that the margins in service and lease lifted 240 basis points and product and equipment piece maybe dropped 120. Can you talk about the margin differential, why the one was lower and the other one was higher?
Yeah. Well, the product is back to the earlier conversation, which is we made less product in the quarter, so absorption was a negative as we took down inventories literally four days from Q1 to Q2, and WellChem was down. You had those double impacts on absorption. It was the single biggest issue. Raws were about what we expected, pricing was what we expected, et cetera. The service component, one, we've got initiatives. It gets a little outsized in terms of what the actual impact was in service, I would say. As we look at it, we don't believe it best illustrates what's going on in the business. When we look at it, we would say overall gross profit combined was, if you take out the inventory move, was flat year-on-year, roughly. We had improvement in SG&A across the board, G&A and S.
We don't price this stuff separately. We do bundled pricing, so separating these things is a bit of an artificial game for us.
Okay, great. Thank you so much.
Our next question is from the line of Christopher Parkinson with Credit Suisse. Please proceed with your questions.
Thank you. When you break down your industrial business by platform, so commercial, F&B, utility, chemical, et cetera, and you just look at all of your long-term opportunities on a global basis, as well as the relative end market growth rates, pricing power capabilities, can you just comment broadly on the longer term margin drivers in terms of mix, your expectations, just any sense we could get on where this business could go over the long term would be appreciated. Thank you.
Well, I'd say water across the board, while we say we're the market leader, it's a very similar story to the balance. We're still relatively low in share. The wind, if you will, or the currents in the water area are very favorable. They're not favorable for the world, but they're favorable for those with technology like ours, i.e., water pressures are going to increase. We know water scarcity is only going to worsen. Something like 70% of the world's GDP is going to be in water scarce areas as soon as 2030. There's going to be a 40% mismatch between fresh water supply and demand as a consequence of growing middle class and finite water supply. All those things lead favorable macro environment, and then we sit here with what we consider best in class technology and capability, helping our customers reduce water consumption dramatically.
This in turn reduces their carbon footprint and energy bill. They end up saving money at the same time they end up saving water. Water itself is too cheap, but because it starts saving energy too, you end up with significant savings. This is true in virtually every industry that we, or every vertical, as you discussed, we compete in. As a consequence, we feel very good about our positioning in water and our ability to continue to execute. Digital will give us more capabilities in terms of shining a light on the difference that we can make, enabling customers to see where they stand in a given industry and what their opportunities are and what types of investments could be made to get what types of returns. All these things we think long term are favorable to us, and then it's incumbent on us to execute.
That's really what we believe the name of the game here is in water. We bought it because we thought it was going to be an important issue for our customers. We knew it already was. All we've done since is learn that it's even more important than we probably felt, and the latent technology, and I would say coupling of Ecolab know-how has been a very potent mix.
Great. Thank you. Just as the quick follow-up, on the Enterprise Selling Initiative, obviously this has been going on for some time. Can you just do a self-report card on how you think you've done, the ongoing opportunities as well as the opportunities still to come? It's clearly been successful in F&B, certainly recently. What other areas, Institutional, Pest Elimination, and Specialty, do you still see the largest opportunities? Thank you.
Yeah. At the time of the merger, and I'm going back and my memory's not flawless, but I believe we said that we were chasing a half a billion in terms of synergy sales. We've more than delivered against that objective. I would say, if anything, what we've learned across the way is how many and how significant the opportunities are. The next chapter here is continuing what I would call synergistic development, i.e., where one innovation on, let's say, F&B and another innovation on the water side, when coupled together, bring even more outsized advantage for customers who choose to buy both from us. We have the same opportunity in institutional and a number of market segments as well. As we crack that code, we believe we're going to have even more success going forward. It's still early.
I would say, look, we chase $120 billion market opportunity conservatively, we're $14 billion-$15 billion. Water is the single largest opportunity of all. We are not sitting here worried about running out of green space in terms of the ability to go generate new business. It's really making sure that we execute and do it well so that we capture it.
Thank you.
The next question is from the line of Rosemarie Morbelli with Gabelli and Company . Please proceed with your questions.
Thank you. Good afternoon, everyone, and congratulations on a strong quarter. Looking at F&B, Doug, the industry was flat, and yet you reported a strong growth excluding acquisitions, corporate accounts, share gains, price, et cetera. Can you talk about, in more details, what's the trends you are seeing in the different sub-segments, like dairy, beverage, brewery, food?
Yeah, I would say, overall, what's happening in our F&B business is one, we're gaining share. We've had outsized share gains, particularly in the beverage and brewing parts of the business over recent trends. Those have been probably the most importantly. Fastest growth segments are beverage, brewery. Food is about on par 4%, et cetera. Dairy is also quite strong at 10%, and it's not exactly an ideal market for dairy. What we're doing is helping customers produce more with less water and less energy. This brings outsize savings to them, and when they're in a flat market, savings are very important, and they get to do this without any sacrifice.
i.e., food safety measurements, I'd say operational efficiency measurements, all are equal or better under these scenarios, and you get the resultant savings in water and energy, and also a storyline around sustainability because it's real. It's that formula that the team has developed in partnership, in concert with the Nalco Water team, and that's what's leading to our ability to drive success in a relatively flat business.
Thanks. That is helpful. I was wondering, looking at beverage, there is a lot of noise around plastic bottles, and there seem to be an increase in the use of aluminum cans versus plastic bottles, at least for waters and other soft drinks. How do you fit in that particular category? Are you going to be hurt if the industry moves to substantially more cans versus plastic bottles?
I'd say first, our position is let's all collectively do what's smart for Earth. We'll all have to adjust our business. With that said, a trade in plastic bottle to either milk-type cartons and/or aluminum cans will not have a negative impact on our business.
You are in both categories?
Yeah.
Okay. Thank you.
Our next question is from the line of Mike Harrison with Seaport Global. Please share your question.
Hi, good afternoon. I was wondering within the water business, you mentioned some new business wins in mining. I was just wondering if these are new mines and the fills associated with the new mines, or are you taking share at existing mines? I guess I was under the impression that it's typically difficult to take share from existing mines, that that tends to be pretty sticky business.
Yeah, Mike, there's two things going on in mining, but the biggest is a mining rebound broadly, right? It's a cyclical industry. We've also had some success with new business in mining. We're targeting and trying to move increasingly away from coal, which you might find obvious into areas like phosphates and the others. These strategies are working. Some of it just reflects moves that we're taking to better position the business long term.
All right. Then, I wanted to also ask about the healthcare business. Can you talk about what profitability looks like in that business and maybe how that has been changing or evolving over time?
Yeah, healthcare, we'd expect OI for the year to be roughly flat. It really reflects decisions to invest in the business. The Anios acquisition that we made a couple of years ago in France, which really gave us even stronger beachhead in Europe. Most importantly, an avenue in a number of other markets around the world has proven to be a great acquisition, we continue to invest in real strong growth opportunities. We're happy to do that. In Europe, as I mentioned earlier, we're seeing 6% organic growth in the healthcare business, we'll feed that.
All right. Thanks very much.
Our next question comes from the line of P.J. Juvekar with Citi. Please proceed with your questions.
Hi, Doug. This is Eric Petrie for PJ. Historically, food and beverage and water growth rates are in the mid-single digits, but now with your digital investments and market share gains, do you see this upper single digit sustainable into 2020?
Look, we are working hard to always increase what we'll consider normal. I think there's a lot of legs. Water's got quite a bit of momentum. We've got good momentum in F&B. We don't see anything sitting here today that's going to make us change our view that that's what we should be growing, that's the rate we should be growing the business. I also don't know what 2020 is going to bring us, I don't want to sit here and commit to 8% on water organically as our terminal value. With that said, there's significant upside in that business. We got a great team, great technology, and they're executing well. I would expect that growth rate to be above average for the company.
Okay. Secondly, I wanted to ask about your M&A pipeline and what you're seeing in terms of valuations. Does your EPS guidance of 10%-14% include any bolt-on deals in second half?
Yeah. Look, it does include any bolt-ons. Anything that probably comes on the remainder of this year is likely to be dilutive as it is accretive, just because there's not much time left in the year. That doesn't stop us from doing the deals. We really look and focus on, do we believe we're going to get a good return for shareholders out of a deal, not immediate accretion dilution. All of them would be incorporated in our forecast already. Our pipeline is large, and I would say so are multiples. As a consequence, we're going to remain disciplined. We are doing deals. We are buying companies where even with the prices higher than we might like, we know we have such significant upside that we can turn it into a very good return deal for our shareholders, and we'll continue to do that.
We're going to exercise discipline as you would expect us to.
Great. Thank you.
The next question is from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your questions.
Great. Thanks for taking my question. I guess I just wanted to dig into the margin profile a little bit more by looking at what seems to be the two biggest factors, which are raw material costs, as well as the cost savings program that you guys have been undergoing here hoping that you could quantify the increase year-over-year in raw materials that you saw, as well as the amount of cost savings that you recognized in the quarter, or maybe the annualized exit rate, just so we could get a sense of what's driving your very good margin improvement in the quarter.
Yeah. For cost savings, it was a little over $20 million year-on-year in terms of what it delivered in the quarter. Raw materials are fairly benign in Q2, following a fairly hefty bill in Q1. Let me just get to that so I don't give you the wrong number. Raw materials were just up modestly in Q2, we expect them to be below last year in the second half. It wasn't a material impact on Q2 one way or another. It just wasn't positive or a significant negative.
Great. Thank you for the color. That's all I had.
Thank you. At this time, I'll turn the floor back over to Mike Monahan for closing remarks.
Thank you. That wraps up our second quarter conference call. This call and the associated discussion slides will be available for replay on our website. Thanks for your time today and participation, and best wishes for the rest of the day.
Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.