Greetings, welcome to Ecolab First Quarter 2019 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 today should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Michael Monahan. Thank you, Mr. Monahan. You may now begin your presentation.
Thank you. Hello, everyone, welcome to Ecolab's first 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's website at 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 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, continued sales growth and margin expansion drove Ecolab's double-digit earnings per share growth in the first quarter. Pricing, new business gains, product innovation led to sales and operating income growth, which, along with cost efficiency actions, a reduced tax rate, and lower interest expense, yielded the first quarter's 13% adjusted earnings per share increase. Moving on to some highlights from the quarter, as discussed in our press release, acquisition-adjusted fixed currency sales increased 3% as the Industrial and Other segments both showed strong sales gains, along with modest growth from the Institutional segment, more than offset a slight sales decline in Energy. Adjusted fixed currency operating margins increased 80 basis points, continuing the good acceleration shown throughout 2018. Growth was led by double-digit gains in the Industrial, Energy, and Other segments.
That operating income increase drove the 13% growth in adjusted diluted earnings per share to $1.03, representing another quarter of double-digit adjusted EPS growth. Currency translation was an unfavorable $0.04 per share in the quarter. We continue to make progress on the spin-off of our upstream business. We currently expect the spin-off to be completed by mid-2020. We continue to work aggressively to drive growth, winning new business through our innovative new products in 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, we look for them to add an expanding range of new actionable insights for our 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 moderating delivered product cost increases and business investments. Currency translation is expected to be an unfavorable $0.11 per share in 2019. Second quarter adjusted diluted earnings per share are expected to be in the $1.36-$1.46 range, up 7%-15%. Currency translation is expected to be an unfavorable $0.05 per share in that quarter. In summary, we expect improving top-line momentum in 2019, which should more than offset moderating delivered product cost increases and unfavorable currency exchange, and along with cost efficiency actions, yield a 10%-14% adjusted diluted earnings per share growth.
We continue to make the right investments in the key areas of differentiation, including product innovation, digital investments, to develop superior growth for this year and for the future. Now here's Doug Baker with some comments.
Thanks, Mike, and hello. A quick overview. Look, we had a very solid start to the year and are in a good position to deliver 2019. On the plus side, Industrial sales are very strong. Margins, as pricing is overcoming the inflationary pressures that we've been feeling, and this is leading to margin recovery. Energy also had strong margin recovery, even with predicted soft sales of -2%. Our Other segment and our other specialty businesses, QSR and FRS, were strong also. The only disappointing news is Institutional, whose sales were weaker than expected. Their underlying sales were 4% in the U.S. and 3% globally. This is better clearly than the 1% reported, but still off expectations by a point or so, as distribution inventories were reduced, this happens frequently, and the exited business we discussed last quarter converted quicker than we had forecast.
We expect the Institutional business to show improvement in reported and underlying sales through the year, particularly in the second half. As we finish our first quarter and move into the balance of the year, we're well-positioned, we believe. The heaviest lifting of our U.S. SAP implementation is behind us with our fourth and final supply chain wave completed in the first quarter of 2019. Our pricing, cost savings, innovation, digital, and talent initiatives are all on track. New business is tracking ahead of last year's record pace. As a result, we expect to deliver double-digit adjusted EPS for the year and in every quarter, and most importantly, leave the year with good momentum as well. With that, I'm going to turn it back to Mike, who will open up Q&A.
That concludes our formal remarks.
As a final note before we start Q&A, we plan to hold our annual tour of our booth at the National Restaurant Show in Chicago on Monday, May 20th. Looking further ahead, we also plan to hold our 2019 Investor Day on Thursday, September 5th. If you have any questions, please contact our 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. If you'd like to ask a question today, please press star one on your telephone keypad, and a confirmation tone will indicate 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 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 coming from the line of Gary Bisbee with Bank of America Merrill Lynch. Please proceed with your question.
Hi, this is David Ridley-Lane filling in for Gary Bisbee. Can you discuss the revenue trends in Europe, particularly in your core segments, Institutional and Industrial?
Yeah, we had a stronger quarter in Industrial than Institutional. Industrial was organic 5%, and Institutional was down a point. QSR had a fairly strong quarter, so if you put them together, you end up with a little better answer. Institutional Europe, I think, is an area where we feel like we're doing the right things to improve this. We put a new GM in Europe late last year. The new GM, Maarten Potjer, started in Institutional. He was a GM who turned around Pest Elimination, North America. We've added a sales field leadership position in Europe, reporting to Maarten. Collectively, that team's focusing on three things: localizing innovation. We got too global in much of our institutional approach. We want to make sure that we're doing the right things and making sure our innovation is tailored for local approach. We're also enhancing field execution discipline.
This is really the key role of the sales field leadership position. We're also adding sales firepower by converting some field resources where we're a little heavy and converting them into corporate account selling resources. Obviously, it's not the same bodies in every case, but it's the same money.
As just a quick follow-up, heard the comment on new business growth. Could you maybe quantify that a little bit or put that into context of your aggregate hiring on the sales force? For instance, are you getting increased productivity out of sales force as well as just hiring more people? Thank you.
Yeah. Over 2018, we added about 3% in sales and service resources last year. We feel we're in a good position to take care of the growth that we're generating as we move forward.
Thank you.
Thank you. The next question comes from the line of Chip Moore with Canaccord Genuity. Please proceed with your questions.
Thanks. Wondering if you could touch on Life Sciences. You continue to outperform the market very nicely there. Doug, maybe talk a bit about the runway for growth, any changes you're seeing in the competitive environment there.
Yeah. The life sciences business continues to do well. While it was performing decently before we, if you will, created a focused Life Science business, it clearly has kicked into a higher gear, and we've averaged double digits since that point in time. Look, we love that market. The market is global. It's consolidated in many sense. If you think about the customer set, it's fairly fragmented, competitive set. That's a good environment for us. We continue to reach out and drive our advantage, which I would say is kind of three fronts. We have very good clean room technology. We have world-class CIP technology. The lessons that we've learned over the years in Food & B everage, and increasingly in other industrial applications, perfectly applies here.
Finally, the Water capabilities that we have are really well suited for this industry as well because it's a prime source for contamination, potentially, et cetera. We're leveraging these advantages quite successfully, growing that business. We made an acquisition, as you'll recall, in U.K., Bioquell, just fourth quarter is when we closed. That's going to also give us additional technology and a new entry point, if you will, into this market. Finally, we've just added manufacturing capability in North America, where we have now registered products. It's going to open up a much broader swath of the U.S. market than we've been able to compete against previously. That will, in a sense, change a competitive environment for us, I don't think for the worse, simply because we'll be able to go after a bigger part of the market.
Got it. That's helpful. Just a follow-up. You mentioned the U.K. acquisition. Is there a pipeline of potential targets in that space?
Absolutely. I would say it's a relatively new space for us. It's not an area that we've probably mined as heavily as we have others in the past. Yeah, there's a nice long list. Obviously, it's got to be at the right time, right price, et cetera.
Thanks.
Our next question is coming from the line of Manav Patnaik with Barclays. Please proceed with your questions.
Thank you. Good afternoon, Doug. Just on the Institutional side, you talked about the distribution inventory issue. Could you just elaborate on that and maybe in past quarters where it might have happened, so that we can take a look back and if that was the main reason why you were a point or two behind your expectations there?
Yeah, it clearly was one of the issues. I would say, distributor inventories move up and down, and we have printouts from the distributors, so we know where every case moves to. Meaning we have a very good understanding of consumption in the industry. As a consequence, it's very easy for us to understand what's happening in terms of distributor inventories up or down based on ins and outs, if you will. This happens almost every year in a quarter. We have some conversation. Last year in the first quarter, our conversation was the opposite. Distributors have built inventory during that quarter, and we talked about how the reported number was a little stronger than the actual underlying sales at that time, and that don't expect that immediately in the second quarter, but we would expect to end the year at a 5% run rate.
This happens frequently. If I were going to sum up Institutional, I would say this. We expected a downtick in Q1, part because of the previously announced exit of low-margin business. However, it was worse than we expected, which we talked about in my opening remarks and Mike referred to. One, the low-margin business exited faster than we had forecast and expected. That's not going to result in any change long term. It's just a timing issue. The distributors did drop inventory in the quarter, which happens. Typically, we'll see a rebalancing and that come back in follow-on quarters. I can't predict if that's Q2 or Q3. It's probably one of those two. The final piece I would describe, for lack of a better term, is the fog of war. This is related to the SAP U.S. implementation.
This doesn't mean we lost consumption because of SAP. We didn't. When you do these implementations, and I'll just remind you, we had four waves in the U.S., the last supply chain wave was just this February, a couple of months ago. The first wave was the February before, and wave three was in quarter four. What happens during these waves is you preload, i.e. build inventory in your direct customers and in the trade. You do it in case you have a supply chain short circuit as part of cut-over. Now, we never saw a short circuit. We were able to get up and running very quickly in every one of our waves, but you still prepare as if that may happen so that you don't end up shorting customers. As a consequence, after these waves, there's all this rebalancing activity.
It's noisy short term and hard to go figure out exactly what's happening. In Q4, North American Institutional was up 6%, but that was driven by a 7% growth number in U.S. Institutional. We said at the time, "That's higher than our run rate. Don't use that as a terminal value." We knew it was a little inflated. We weren't exactly sure how or how much. As we look at first quarter, obviously we see a lower than expected number. Certainly in that wash, there is this rebalancing and all the other stuff going on here. Now, when we look at March and April, we see much more normal activity in our North American, particularly U.S. Institutional business, and see sales as we would have expected all along.
We think the noise, as we would expect from past experiences, sort of moving out of the business, and what we're going to see is more normal behavior. When we look at all the underlying things, pricing, new business, lost business, other than the low-margin stuff I've talked about, a lot of stuff is exactly on track. We know that if we continue to focus on these things, we'll show improvement. The key metrics to us are new business and pricing. If we drive these, and we expect to, the rest self-cures. The losses annualize, the distributor inventories rebalance, and the SAP implementation costs, which are not insignificant, by the way, and 70% hit Institutional are also recouped. There's some natural margin lift as we move through this, just as we start getting through this noisy period. Net, we think we'll see an improvement in Q2.
I'd say modest, but a more significant improvement as we get into the second half in Institutional. I think we have a good understanding of what's going on. Business is doing what it needs to do to go drive value, and we expect Institutional to be as strong business as it always is.
That's super helpful with the color. Maybe just along the same lines on Industrial, should we think of that 7% growth as sustainable or maybe there's some timing and it might sort of stabilize later?
Look, our Industrial business is really led by Water and F&B, have obviously been strengthening sequentially for a number of quarters. It's driven by both pricing activity and by volume. Volume driven by a lot of new business, which we've been talking about in almost every call, how we're having very good new business success. That's clearly in the Water and F&B business in particular, also in Institutional, et cetera. The Food & Beverage organic growth rate is 7%. I wouldn't say that's our terminal value, but F&B has really done a heck of a job partnering with Water to bring outsized value to customers, and this has turned into big sales with big players. Now, we'll annualize against some of these sales in quarters. Every quarter is not going to be a 7% organic.
With that said, we expect to have a very strong year in F&B and a very strong year in Water. Is 8% exactly sustainable? I'm not going to commit that to every quarter, but we expect mid- to high-single digit organic growth rates in these businesses. We also are starting to see the margin leverage that we've talked about. We had significant raw material and logistic inflation impacting all of our businesses, but in particular, our Industrial businesses. They've been on pricing, and this pricing is now starting to overwhelm the inflation in that business, and we're starting to recoup the margin losses that we've seen. This isn't going to be overnight either, right?
This is going to take us some time to rebuild these margins, but you should expect to see positive margin build throughout this year, and it's going to need to continue into next year. Some of that's going to come from pricing, some from cost savings, some from doing a better job operating supply chain now that over 80% of our volume is on SAP. We just have better visibility and a better and a more easier, if you will, kind of foundation to run on. Those are the key things to look for and watch, particularly in the Industrial business.
Thank you. The next question is from the line of Laurence Alexander with Jefferies. Please proceed with your questions.
Good afternoon. Two questions. First, on the Institutional growth rate, as you think about the cadence of this year and the pricing initiatives you have underway, should we see that business sort of exit the year at about a 4%-5% kind of run rate? Is that a fair way to think about it? Secondly, can you give a little bit of flavor about Colloidal and how long you think that can sustain a double-digit growth rate?
I'll do the small one first. Colloidal. I would say Colloidal is an interesting technology. We have it. There's capacity constraints in the world and other areas will continue to drive the growth there. That business we're going to continue to manage, we think, very intelligently for cash and return and other things. We want to do the right thing for our customers, but we're also going to do the right things for shareholders as we look at this business. In Institutional, yeah, I would say there's really not a caveat, because if you want to say, do we expect to be at a 4%-5% run rate on December 31st? The answer would be yes, because by that time, we would have no longer be lapping the lost business. Right? It would be pretty much out of our sales.
I think that would be a comfortable yes that we would exit the year at that run rate because of that.
Okay. Can you give a bit of a flavor for how you're thinking about the sales force incentive programs? That is, are you comfortable with the current set, or are we going to go through one of these periodic refresh and refocus cycles? Can you just give us a sense for where you're at on that?
I would say, Laurence, we re-look at comp every year and make minor adjustments almost every year. There are episodic times where we go through major adjustment in a given business, meaning we went through one in Pest about three years ago, quite successfully, I would add. You couldn't even see it in the business, but we changed the comp there dramatically. In Institutional, there's certainly areas of that business where we are going to revise comp programs, part to reflect new regulations or the way regulations are being enforced, and some because we think it's going to. We'll do that in a way like we did with Pest, where I don't think it's going to be visible to anybody except those in the business. We want great people.
We want great people incented to do the right thing and also incented enough where they want to continue to stay here and can make enough money to make a career out of it. We always have evolutionary change around here, and there's nothing on the horizon that I would say would be noteworthy.
Maybe if you wouldn't mind, just one last one. On Healthcare, is there a reason why the business model there hasn't flexed more in response to sort of the disappointing growth rates? I mean, why it hasn't evolved into, like, a partnership with an insurance company or some kind of other way to g et an end run around the bottlenecks that you've seen in terms of the purchasing managers?
Yeah. Well, look, we've certainly explored a bunch of different things. Here's what I would say. The Healthcare business, our program business, which is really what we're emphasizing, continues to do well. These are programs around room cleaning to reduce HAIs, around OR turnover and accelerating turnover, both time and efficacy, and also in central sterile, et cetera. These programs are doing quite well. The issue, which is principally in U.S., is just one of portfolio mix. These programs are still relatively small versus what I'd call the historic product approach. As time goes on, obviously, since the programs are growing so much faster than the products, they're becoming a larger percent of the portfolio. What you'll see is the sales will reflect that, but that just is going to take some time. The team, I think, is doing exactly the right thinking after that.
That is having good uptake. In Europe, our mix is a little bit better. In Europe, we expect to have mid-single digit, low single-digit organic growth rate. Anios is doing well in Europe. They've got very strong program mix in a number of areas. Some of those we're exporting to other parts of the world, including the U.S., once we get registrations. I would say, underneath the covers, we think the Healthcare business is more right than wrong. We would like to accelerate it. We would like to see faster, better results too. If you look underneath, good things are happening, and we want to make sure that we stay focused on what we think the long-term advantage is.
Thank you.
Our next question is from the line of John Roberts with UBS. Please proceed with your questions.
Hey, guys. This is Josh Spector on for John. Just a question around Energy. Given some drivers for the spin around customer buying patterns shifting and maybe moving a bit away from the kind of the Ecolab heritage model and slower growth there in the quarter, do you see any risk of another shift going on that could impact second half? Or do you have pretty good visibility into the sales growth there?
Yeah. The Energy quarter, if you will, the soft sales of - 2%. We expected it to be flattish coming into this quarter, plus/ minus. The 2% to us, look, I'd rather have + 2% than - 2%, no doubt about it, but it was around where we expected it to be. It's not the easiest business to forecast. Really, we expected these types of top-line results for two reasons. One, there's a dramatic reduction in just activity. A lot of this is occurring in Permian. If you look at others in this business, you're going to see, I would say, even lower sales rates than we had. We're not alone. Ours would probably be on the better side. The second reason was we were going against a high base, i.e., first quarter last year was an 11% growth quarter.
Even at the time, we said it was in part driven by one-timers, and we knew those one-timers weren't going to recur again in this quarter. Hence, the reason we were sort of bearish on the first quarter. It's not a change in buying pattern. It's not a change in all of a sudden we're out of favor at all. We would expect that as the year goes on, you're going to see stronger top-line performance. Most importantly, even in the first quarter with negative 2%, we had double-digit OI growth in that business as we are recovering on the margin side handily due to the pricing work that we talked about every quarter last year, and it's continuing, and now is being coupled with excellent cost savings efforts as well, impacting both gross profit and SG&A.
We expect mid-single digits in this business for the year top line, and outstanding margin recovery driving even much better OI results for the year as well. I'm not really worried. I think the stuff that the Energy business is doing is smart, right, and it's going to bear fruit for the year.
Okay, thanks. Just a quick follow-up around the Energy spin. I don't know if it's too early to ask about any numbers around that, but I guess if I try to think about how much amortization stays with Ecolab and goes with the spin, do you have a rough cut there?
Yeah. $170 million of amortization goes with the spin.
Okay. Thank you.
The next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.
Thank you. Doug, you have some new competitors over the last six to nine months in Water and Institutional. How are they acting in the marketplace?
I guess our new competitor in Institutional would be new owner.
I'm sorry, new owner. Yes, I'm sorry.
I would say, they're acting like they've always acted. We really don't see a significant difference. They can be really aggressive at times, bidding on new business. This has been a pattern for years and years. There have been frequent times over the last I've been here 30 years, any time during the 30 years, but over the last 15, 20, I have a better memory, where we've blinked and walked from business where we're not going to make money, in some cases, not make cash. We don't think that's smart to stay in those situations. We've had some recently, but we've had them two years ago, three years ago, five years ago, seven years ago, 10 years ago. In many instances, these businesses end up back with us, not 100%, but a fairly high percentage.
What we want to make sure that we do is maintain our ability to do a great job for customers. We're there for customers when they need us. We've got to be able to make money so that we continue to invest in innovation and digital and all the like. We've got to play a disciplined game as well. That's the story there. On the Water side, GE Water is now owned by SUEZ. I don't know that there's a dramatic difference day to day. We thought we were well-positioned against GE Water, and we respected them. We respect them now that they're owned by SUEZ, but we remain, in our minds, quite well-positioned as a competitor in this area, and you can see it in the strong results. I don't think our competitive environment has really dramatically changed one way or another.
Very good. Just on your delivered product costs, I know they'll be moderating through the year. What were they up year-over-year in Q1, Doug, and what should they be up by the end of the year on a quarter, maybe on a Q4 over prior year basis?
Yeah. We're forecasting 3%-4% inflation for the year. For the first quarter was the most significant year-on-year, 5%+ , probably, percent increase in the first quarter. It abates for two reasons. Mostly because we start running into an inflated base, if you will, i.e., raw materials got more expensive throughout the year last year, so the delta decreases as you move forward, as long as you don't see dramatic inflation this year. We have some inflation forecast this year. We've held that forecast. Last year, we got burned on raw materials. The indices we follow were completely wrong last year. If you looked at the indices this year, they would say that inflation is going to be less than we have forecast currently. We don't know if that turns into upside for us or not.
We're being a little more conservative this year based on last year's experience, which means we'll be wrong two years in a row, I hope.
Thank you very much.
Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thanks. If I could just ask a question on pricing. You touched on this a bit earlier in the Institutional comments, but just want to know how price was across the segments, if there were any meaningful discrepancies or anywhere where you still need to work a little bit harder. Then just within Institutional, is price flattered at all by the exit of the low- margin businesses in any meaningful way?
No, that would show up in for us in more mix than it would have in absolute price, the way that we measure the margin stuff. I would say two things. We continue to accelerate on price. If you will, it's five quarters in a row, it still is around the 3% rate. Industrial had the strongest price number. They need it because, one, they were probably the furthest behind and have been playing catch up and doing a very good job doing it. They got a couple of years of big raw material inflation numbers in their business, they're working to recover those, obviously working with customers to do it in a way that works, et cetera. Institutional always takes more a slow and steady approach on pricing.
They don't get hit and rocked as significantly with raw materials as some of our other businesses do. Part is the mix of the raw materials, part is solids and the other technology that they've deployed over the years. They've got a lower, more like a 2% price, if you will, year on year. Energy was also 3% in the quarter as well. Energy also obviously sees significant inflation. We expect to continue to get pricing throughout the year. We need to. We have margin recovery goals. Our plan isn't to expand margins during this cycle, but our goal isn't to lose margin either as a result of this. We'll expand margin through our own efforts internally, i.e., leveraging the SAP implementation and other work to help improve margin and/or innovation. That's where we are on price.
I would say the team is doing a very good job. It's always hard.
Just as a follow-up on the de-stocking, it sounds like from your comments earlier that this would be something that would take place within a quarter, that it wouldn't straddle two quarters based on your look at the printouts or the books and stuff and the conversations with the distributor customers. Is that correct?
Yeah. Look, we don't control it absolutely, obviously. If I went on history, we go through this literally every year in a quarter. Obviously when it helps us, nobody remembers it, and when it hurts us, they don't remember it once it bounces back. I would say this is a very normal thing. We would expect it to bounce back, and as I said earlier, I don't know exactly if that's second quarter or third quarter, but it's probably one of the two, most likely. That's typically the pattern we've seen in the past, and there's no reason to believe that that won't be the pattern we see here.
Okay. Thank you very much.
The next question comes from the line of Hamzah Mazari with Macquarie. Please proceed with your questions.
Hey, good afternoon. Thank you. My first question is, any update you can provide as to your Circle the Customer initiative? Specifically, which verticals, it seems like Food & B everage is one, which may be sort of optimized in terms of selling your entire product suite to corporate clients, where you think there's room to sort of improve that?
It's been a key part of our strategy and a key part of our success, particularly in Industrial, as we put Nalco, made Nalco a part of Ecolab. We came out of the gates and said one of the key areas we wanted to focus on was the F&B market. If you look at what's occurred in F&B over the last six years, it's been really amazing. If you look at the brewery business in particular, how we've been able to very successfully marry Water and our F&B, clean-in-place food safety technologies together to create outsized value for customers, it's driven share. It's been a key part of how we went to market strategically, how we created value for customers, and the reason that we've won. Coupled with that is always Pest Elimination.
It's also led us to understand other parts of the Pest business, like fumigation. It's then led pest to start, one, buying and acquiring some fumigation businesses, which we've done recently, and starting to build a larger business in that area, because it's core to the F&B market. That's a great example of how Circle the Customer drives value for customers, share for the company, and also opens the door to new opportunities as well. There are other examples. I can do warewashing technology being leveraged in QSR and in some instances in our food retail business, coupling with the Institutional capabilities. There's plenty more, but I don't want to take up too much more time.
No, that's helpful. Just to follow up, on Healthcare, you may have touched on this earlier in a question, specifically, does your go-to-market strategy in that segment need to change? Specifically, more of a C-suite type sale? Are you just talking to the wrong people in Healthcare? Just curious around go-to-market, if that's a drag at all on growth. You may have touched on this, but any color there? Thank you.
I think, we talked Healthcare earlier, I'll sum this way. I think the way we've really focused strategically on program selling there. The programs that we have out in the market are growing, and we're having success selling them. Those are programs around room cleaning and HAIs reduction, Operating Theater, if you will, changeover and also better efficacy, then also in the central sterile. Those programs are working and growing. The issue, which is principally U.S., is they're still a relatively small piece of the total portfolio, that sales is sort of masked, if you will, by the product sales that represent the balance of the portfolio, where you don't have the same strategic advantages that we have in program selling. Our nose is the grindstone. Sell programs. Keep focusing.
The portfolio will shift over time because it's growing at 3x , 4x faster than the other. We know what will happen, then you'll start seeing the sales come through, but that's our strategic focus. There we are clearly calling on the right people. We're not flying the white flag on the product side, but it's just a different competitive environment and equation, which is why our efforts are going towards programs.
Thank you.
The next question comes from the line of John McNulty with BMO Capital Markets. Please proceed with your questions. Moving on to Tim Mulrooney with William Blair.
Good afternoon.
Hello.
First, Doug, your Industrial business, can you just give us an update on the Industrial business in China? It's hard to know what's going on over there sometimes, but your Water numbers are so strong. Just curious if the market's getting better or worse or about the same?
Yeah, look, our China business overall was mid-single digit growth in the first quarter. Decent profit. I would say it was really driven by the Institutional side, so I'm getting to the point you'd like me to talk about. The Institutional collectively was double digits, doing quite well.
The Industrial side of the business was flat to down modestly in total. Really driven by Paper, which is down more dramatically. They're not making as much corrugated for export shipments in the meantime as we go through this. Certainly, we're impacted somewhat with the trade discussions there. We don't see this ultimately turtling our China business for the year by any means. We think it'll probably, one, if we get the trade agreement figured out, it'll open the door. Even barring that, as we look at the progression and everything else, we think we got more good than bad in that business, and we're going to have a good year either way.
Okay. Thanks for the update. My follow-up is on SG&A. SG&A adjusted for one-timers was actually lower than last year despite revenue growth. Is that primarily the result of your cost savings initiative? Do you expect a similar dynamic through the remainder of the year?
Give me one time. Yeah, I would say, SG&A, certainly we have strong cost savings initiatives in place. We would've said in the first quarter, probably delivered about $20 million, which is on pace to the $80 million that we've talked about. If we're going to handicap the year, we probably have upside on the cost savings side of the initiative pile in terms of you need some with some upside because you never know what's going to happen in other things like FX, et cetera. Yeah, those are driving it. We are also leveraging technology in a number of parts of our business as we go forward. This is also enabling us to do more, via each person. It's a combination of things, but cost savings certainly is a driver.
Okay. Thank you.
Thank you. The next question comes from the line of John McNulty with BMO Capital Markets.
Yeah. Thanks for taking my question. Quick follow-up or one or two of them. One, on the raw material front, where are the buckets that you're actually seeing the inflation? It does seem a little bit counterintuitive given oil coming off the way that it has that you're forecasting something in kind of the low to mid-single digits for the year. Maybe help us to understand where you're seeing some of those pressures.
Yeah. Well, oil year-on-year is up nearly 50%. We got to go compare back to Q1 of last year. That's what our comparison is here. Beyond, if you will, sort of oil derivative raw materials, certainly caustic is up for us. Transportation costs grew double digit last year, particularly in the U.S., we had inflation also in other markets, Europe in particular. Our two biggest markets, if you will. There's a number of areas where there's been inflation in raw materials. I would say last year was significant. It followed a fairly significant year, the year before. It was kind of a two-year run. We are forecasting moderation in the inflation rate, not deflation this year. We still think that's the right forecast, we hope we're wrong.
Got it. It's been a couple of months since you announced the split or the upcoming split of the upstream Energy business. Can you speak to whether or not you've seen interest from potential buyers in that business at this point?
Yeah, that's not something we would comment on publicly one way or another.
Got it. Fair enough. Thanks for the time.
The next question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.
Thank you. When you look at your various platforms, what are the largest opportunities to improve margins over the long term outside of simply price cost? Perhaps shifting even more, I'd say, to a service model. I know Institutional in Europe has clearly been a longer-term opportunity, but where are the other ones that long term guys should be thinking about? Thank you.
Yeah, look, I think there are a number of areas. You started in Europe, we had a 3% OI margin in Europe and are now 9% and knocking on double digit. We've done that over a seven, eight-year period of time. I would say the opportunities that existed there still exist, and they exist everywhere else. As we now have SAP implemented through our supply chain and our finance backbone in North America, we now have visibility and different visibility into the U.S. market than we've had ever via ERP. It's replacing a system called Cullinet, which we think is 40 years old, but we can't find any marker on the box. Let me just say our visibility is enhanced significantly. We would expect there's significant savings in supply chain.
The, if you will, kind of freight channels throughout North America, the pricing on those channels has changed dramatically over the last two years. We know that we've got to recognize that in the way that we shift supply or manufacturing in plants. Where do we supply what customer from where, and how do we do that? There's significant money there. We know that there's a number of policy issues that we're getting after that didn't reflect the current reality and now do. That is going to reduce the number of shipments it takes to ship the volume we're shipping today. We know we've got to get better standards there. Formulation reductions, not just SKU. The most important part of SKU is formulas. If you reduce formulas, you reduce raw materials, and you end up with more scale in buying.
There's a lot of work around that area right now in Energy, but increasingly in our Water business and in other areas as well. If you look at just relative margins by business, we know there's significant upside still in Water and some of the other businesses that came over with the Nalco acquisition. Their margins have been enhanced significantly since they've come over, but the team does not believe we're at the edge there or at the end by any means, and we want to keep driving that. We talk about 50- 75 basis points as sort of your typical run rate. Clearly, with the announcement of the Accelerate Initiative and the cost savings there, and also that we're in margin recovery zone time because of the recent run-ups, we expect to run significantly over that range for a period of time.
We need to recover and get back on track on margin build.
Got it. Yeah, I apologize for the stereotypical, simple sell- side question, but can you comment on the overall M&A landscape, particularly in Asia and Europe? Thank you very much.
Well, Europe's probably as good as it gets in the U.S. right now, simply because a lot of people are unsettled. With that, often comes opportunity, certainly in the U.K., but I would also say on the continent. In terms of Asia, the challenge in Asia is scale and culture, i.e., can you buy a company that's meaningful enough in size to be worth the risk and the effort to bring it on and integrate it? Then culturally, and this isn't the Asian culture, just make sure what's the company's culture and how has it been built, in terms of how it sells and creates value, et cetera. There, we've got to make sure that it's a company that we would have a right to own and run as we go forward.
Generally, I guess, I think we're gonna enter a period where acquisitions of even size are gonna make sense again. It'll happen. I don't know exactly when it's gonna happen, but being smart about the price you pay is always a good idea. It proves out over time, we believe that value is created through return on invested capital and our ability to generate cash. Those are the things that we look very carefully at when we make acquisitions. That can we do those things over a period of time? If the answer is yes, we're all in. If the answer is no, we're quite careful unless it's got some seminal strategic value beyond just cash creation, which is hard to find often.
Great color. Thank you.
The next question is from the line of Mike Harrison with Seaport Global. Please proceed with your questions.
Hi. Good morning. Was wondering, Doug, if you can talk a little bit about what kind of trends you're seeing in restaurant foot traffic, and if you could maybe talk about that by region. Sounds like really outside of Latin America, nothing's really much to write home about.
Mike, I would say kind of agree. I would say this. I don't think the foot traffic anywhere is going to impact our business. It's neither dramatically. The places where you got fast growth in food service is Asia. We're all about scaling, getting after share. We've made a number of key moves in the last 12 months in China, which we think put us in a much better position to get after that business on a faster basis. It's a business that's already growing in the teens, but it should do better, and we're looking to do that. In the U.S., foot traffic seems to have been soft my whole career, and yet every time I walk into a restaurant, it seems to be full. I can't quite get over these two problems. By and large, throughout that period, we've had very good growth.
There are a zillion restaurants we don't sell yet. We would like to sell them. Until we have 100% share, we're not gonna talk about foot traffic as our problem.
Right. Wanted to also ask about the strength that you're seeing in Food & B everage. Are we seeing any improvement at all in the underlying market there, or is it really just share gain that we're still capturing?
Yeah, it's principally driven by share gain. People are still eating, obviously. You got some markets that are still fighting through some challenges. The team's done a very good job for all the reasons I discussed earlier, partnering with Water and Pest, et cetera, driving outsize value, which is leading to some very significant wins.
All right. Thanks very much.
Our next question is from the line of Rosemarie Morbelli with G.research. Please proceed with your questions.
Thank you. Good afternoon, everyone. Doug, I was wondering if you could give us a little more detail on the changes you have made in order to grow faster in China. You said double digit is good, but you can do a lot better. What changes have you made?
Well, I think in a couple areas. If you want to talk Institutional, we've organized a bit differently simply because that food service market is developing differently than markets have in the past. They get to learn from U.S. history and European history. They have concepts which don't fit neatly in boxes, and we've got to go be prepared to offer what those concepts need and around service custom-designed for those concepts, not maybe the same exact service package that we've had in other markets, designed for China. We've invested more, if you will, on innovation resources in China, on digital for China resources in China, organize our construct of businesses a bit differently to allow a better blurring of lines and have somebody overseeing it, so they can make smart choices for customers first and by doing that for the company.
There have been a number of steps and most notably increased resources. For all those reasons, we think we're just better positioned. We've learned a lot over the last few years. We've done decently. As we look at it, we just thought the way we were structured and the way we were resourced was a hindrance, if you will, not an offensive weapon, and we wanted to change that.
Okay. Looking at, now you have your SAP more or less internationally installed. Now that you have this, can you see the potential benefit from your restructuring to be above the $325 million that you have initially estimated?
We would agree with you as long as it's positive for the business, i.e., doesn't hinder our ability to deliver for customers, more would be better and not lost on us. We're not in a position right now to increase our estimate of those. We just took it up $125 million from $200 to $325 when we announced the spin, which will enable us, as we all recall, to both cover the $70 million of estimated stranded costs and still deliver $200 in, if you will, Ecolab ex-spin. I think it positions us well, and on the spin side, they'll be more than able to cover their costs of building the kind of public company infrastructure they need to build, which they estimate at $35 million. I think we're in good shape there. If we can do more, we will.
It behooves us and the shareholders, that's what we're paid to do.
Thanks. If I may squeeze one in. You said that you were expecting to close the Bioquell acquisition by the end of the year, by the fourth quarter. Are there some issues regarding the competitive environment? Are you dealing with anything that you may have to change?
Yeah, Bioquell we did close. Holchem, we've closed, we're going through a competitive review. I would say right now, we're working with the authorities in the appropriate way, that's the path we'll follow.
Okay, thanks.
Our next question is from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Thanks. Good afternoon. Doug, Specialty's been a real bright spot in Global Institutional, another good quarter. You cited, I believe, some business wins. I saw also that second quarter may slow down a bit on new customer rollouts, still a solid year. Could you just elaborate a little bit on this subsegment? What is going on with the new business wins and some of these initiatives that you'd highlighted in the release? Thanks.
Yeah, I would say both the QSR teams and the food retail teams are doing a really good job of, one, driving new business. They're leveraging innovation to do it. They have a strong pipeline. They've been at the forefront on Institutional and digital food safety technology, which is already making a difference, and we think going to make increasingly a difference in their ability to secure new wins going forward. That's been significant development costs, which has really been borne principally in the Institutional side of the equation. As that starts bearing fruit, I think you're going to see enhanced margin as well as we go forward. There are a number of large opportunities that exist both in QSR and FRS, U.S. and around the world, that I think our team is doing a good job targeting and getting after.
There are occasions, we give you a heads up on Q2 that they may have slower than current run rate sales for a quarter. That's when they lap an unusual quarter the year before, where you might have had a pipeline load for a new customer, i.e., you've got to build their distribution network and their stores simultaneously, which just means you get four months and three. When you lap that, it's tough to replicate it. We just try to give fair warning. That occurs in many of our businesses occasionally through quarters throughout a year.
Great, thanks. One more if I could. The CapEx and free cash flow a little lower this year in the first quarter than last year. Last year, a bit of a unique comp year, any thoughts, I know it's early in the year, about what we should expect from these two going forward for the full year?
Dan can have that one.
Thank you. Sure. Absolutely.
Yeah, you're right. It was annualizing, first of all, in the first quarter of 2019 against a very strong performance last year in which we grew the business but consumed almost nothing in the way of incremental cash flow. Part of the year-over-year comparison is what you're seeing. Look, we still feel great both about our longer-term record of delivering great cash flow generation from the company, and think that 2019 will be another great example of that. Sitting here today, I expect that our free cash flow conversion, which is the metric that I track most closely, will be in the mid-90% range. Feel good about cash flow and how it's developing and for the year.
Great. Thanks.
Thank you. The next question is from the line of P.J. Juvekar with Citi. Please proceed with your questions.
Hi. Thank you. This is Eric Petrie on for P.J. In Water, could you just discuss the growth profiles underlying in light industry versus heavy industry and perhaps provide an update on 3D TRASAR penetration?
Yeah, they were very close, in fact. Not a big differentiation in growth rates between heavy and light. Both perform quite well, and we expect both to perform well for the year. In terms of 3D TRASAR unit penetration at this point in time, we're nearing 40,000 units outstanding. We can get you an exact number if it's important, if you want to call Mike or Andy.
Okay. Secondly, your first quarter volume growth of 1% is kind of lagging the overall fiscal year 2018 of 4%. How do you see that going forward, and do you expect price to make up the delta?
The 1% for the company?
Yeah, 1% of the first quarter versus 4% for full year 2018.
Yeah. The 1% was clearly impacted also by FX. FX is going to be a particular challenge in the first quarter and second quarter, but at current rates and forecasts, not a significant challenge in the second half. Some of it's just that. The other, we talked Institutional, which we expect to improve, and Energy, which we expect to improve.
Great. Thanks.
Thank you. Mr. Monahan, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.
Thank you. That wraps up our first quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation, and our best wishes for the rest of the day.
Thank you for your participation. Today's conference has concluded. You may now disconnect your lines at this time, and have a wonderful day.