Greetings. Welcome to the Ecolab third quarter 2018 earnings release conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce Mike Monahan, Senior Vice President, External Relations. Thank you, Mr. Monahan. You may now begin.
Thank you. Hello, everyone. Welcome to Ecolab's third quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO, and Dan Schmechel, our CFO. A discussion of our results, along with our earnings release and the slides referencing the quarter's results and our outlook are available on ecolab.com/investor. Please take a moment to read the cautionary statements on these materials, stating that this teleconference, the discussion, slides include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under Item 1A, Risk Factors, of our most recent Form 10-K in our posted materials. We also refer you to supplemental diluted earnings per share information in the release. Starting with a brief overview of the results, Ecolab's solid growth momentum continued in the third quarter.
New business gains, accelerating pricing, and product innovation drove strong third quarter acquisition-adjusted fixed currency sales growth in all of our business segments. That strong top-line growth, along with cost efficiency and a reduced tax rate, yielded the third quarter's 11% adjusted earnings per share increase. Moving on, some highlights from the quarter. As discussed in our press release, acquisition-adjusted fixed currency sales increased 7% with strong growth across all business segments. Regionally, sales growth was led by North America and Latin America. Adjusted fixed currency operating income rose 6%, continuing the acceleration shown throughout 2018. The operating income gain, along with a lower tax rate, yielded an 11% increase in third quarter 2018 adjusted diluted earnings per share.
We continue to work aggressively to drive 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. We also continue to see solid underlying sales volume and pricing across all of our business segments. However, after offsetting the bulk of $0.75 per share of increased delivered product cost and currency exchange headwinds since our initial 2018 forecast, we expect the fourth quarter will see further significant increases that leave insufficient time to offset them this year. We now expect 2018 adjusted diluted earnings per share to rise 11%-13% to the $5.20-$5.30 range as volume and price gains offset the impact of higher delivered product costs and business investments.
Fourth quarter adjusted diluted earnings per share are expected to be up 8%-15% to the $1.49-$1.59 range. Work on the previously announced $200 million cost savings initiative, which is leveraging our recent technology and systems investments, is making good progress and will benefit the fourth quarter. In summary, we expect continued strong top-line momentum in our business over the balance of the year to more than offset higher costs and deliver operating income growth. Along with cost efficiency actions and a lower tax rate, yield 11%-13% adjusted diluted earnings per share growth this year. Importantly, despite the significant headwinds, we are continuing to make the right investments in key areas of differentiation, including product innovation and digital investments, to develop superior growth for the future, and we expect to sustain strong momentum as we exit the year.
Now, here is Doug Baker with some comments.
Thanks, Mike. In short, I'm happy with our business performance. I'm not happy at all that we had to lower our guidance, but the story isn't very complicated. The business results are strong. Volume growth, pricing, innovation, new business, cost savings, we're all meeting our ambitious targets. Organic sales were plus 7% for the third quarter. We expect equal or better in Industrial, Institutional, and Other in Q4 compared to their Q3 results. The exception will be Energy, which is mostly a comparison issue. It's going against a 12% Q4 last year, which we had said at the time was one-time driven. Pricing also accelerated again in Q3 across the board and will again in Q4, so we will leave the year at a 3% clip. Everything else operationally is in line also, including cost savings.
The unexpected was principally raw material costs, which continue to defy gravity indices and certainly our projections. In total, raws were $0.11 more than we had last forecast, and FX piled on for another $0.04. Nearly three-quarters of this hits Q4. Time is the enemy here. Short-term moves like slashing investments or halting our U.S. SAP rollout would be foolish. We are not doing it. Instead, we continue to focus on pricing, cost savings, and volume growth. These don't spike to match raws, so it takes more than a quarter, which brings me to my next point. We are winning. We're winning in the marketplace. We're winning against inflation. Clearly, we're outpacing market growth across Industrial, Institutional, Energy, and Other segments.
Even with the dramatic raw materials and transportation inflation, our pricing volume cost-saving efforts are leading to improving results, with OI accelerating over the last three quarters and expected to continue in Q4, even at our new forecast. Also, adjusted EPS for the year remains double-digit. Perhaps most importantly, we enter 2019 with significant volume pricing and cost savings momentum. All this puts us in a good position to continue building our earnings momentum in 2019 and throughout the year, even in an environment where we have continued high raw material inflation, which is how we are planning for it. With that, I'm going to turn it back to Mike.
Thank you, Doug. That concludes our formal remarks. Operator, would you please begin the question and answer period?
Thank you. We'll now be conducting a question and answer session. We ask that you please limit yourself to one question and one brief follow-up per caller so that others will have a chance to participate. To ask a question, you may 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 move 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 Gary Bisbee with Bank of America Merrill Lynch.
Hey, guys. Good afternoon. I guess the first question, if we assume that raws and FX remain relatively around where they are right now and project that forward, would you anticipate adjusted operating margins increasing in 2019 before benefits from the $200 million cost reduction program? I guess, just trying to think through operating leverage outside of another meaningful step up in raws.
Gary, not to get detailed, meaning certainly if raws stopped increasing and stayed at the elevated Q4 levels, you would start seeing gross profit improvement very early in the year-over-year. Our forecast is more conservative than that at this point in time, which is not consistent with the indices or the published indices. We're looking and making sure that we perform in an even more difficult environment. There, you might delay it until Q2, Q3, where you'll start seeing margin even without the $200 million, because most of that's going to be SG&A, not in cost to goods. That probably is the best way to answer the question. Obviously, we're not going to go forecast the year right now. The environment's fairly dynamic.
We're working hard to take hard looks at what the sensitivities are around raw materials, et cetera, and put ourselves in a position to deliver no matter what.
Great. The follow-up, obviously pricing accelerating has helped revenue, but the last year you've had much better volume in mix growth than you'd had in the prior several years, really. I guess, how sustainable do you think that is? I know you've seen it pretty broad-based, but is there anything in particular you'd call out for driving that improvement in the volume side of revenue growth? Thank you.
Look, it's always a combination of a couple of things. Certainly, I think our own efforts have a lot to do with it, but we're also in a fairly good economy, and to not note that, I think would be misleading. Our new business productivity, our innovation, I would say our capabilities around leveraging the combination of water with F&B and increasingly with institutional has only enhanced, and we're having great success there as well. I think those things are going to be quite resilient in all economies, because what we're ultimately demonstrating is that you can get best-in-class results and save money because of our capabilities around reducing water and the corresponding energy related to it. It ends up to be a very economic story too, which will still resonate if the economy slows.
Yeah, I would expect that the vast majority, we will have strong results moving forward. I don't expect a 2008, 2009. I reserve the right to change everything if that's what we see. I think our expectation next year is the economy will be fairly good, albeit a little bit slower than this year.
Thank you. Our next question is from the line of Tim Mulrooney with William Blair. Please proceed with your questions.
Good afternoon. Doug, can you just give us an update on your institutional business? How does the competitive environment look, and what are your thoughts on pricing and volume as you work your way through the fourth quarter here?
Well, our forecast, as I mentioned earlier, for all the businesses except energy, is that they'll be equal or maybe even a little stronger in Q4 than they were in Q3. That includes institutional. The institutional business we had forecast at the beginning of the year would be accelerating to about 5%, and that would be its exit growth rate for the year. We're there, and we expect to stay there in Q4. The competitive environment for institutional, we're going through another wave where we have a very aggressive price competitor, Diversey, and they have been quite aggressive in several accounts. Some we have frankly allowed to move or stopped competing because the price got to such a point that it doesn't make any sense to do the business. We don't like to buy work, if you will.
We've gone through this a number of times before. In some cases, the business finds its way back to us within a not terribly long period of time. I don't know if that's going to happen here or not. With all that said, if you look at our net wins and losses against Diversey for the year in total as a company, we remain considerably up. It's not like we're not continuing to win there, but they've had a couple of big wins because they're doing it at prices that don't make a lot of sense to us, and we don't believe they have any cost advantage. With all that said, our institutional business is improving and has improved. Certainly, we'll have to walk through this, but we'll fight it the old-fashioned way. More new business, innovation.
I would say as we've been looking through institutional, we also believe we have real cost savings opportunities. Nothing to do with people, but a lot to do with product line and some other opportunities that we're going to go capitalize and take advantage. We would expect institutional to be a good performer again next year.
All right. Thanks for all that color. As my follow-up, I'll pivot to your water business, which had great performance in the third quarter. For water, was there an uptick in light industrial, or is the acceleration in growth primarily being driven by heavy industrial and mining?
Yeah, all of them are performing well. We had improvement in the heavy business, which we've been talking about, because the heavy team really starting a year ago, was really strong in accelerating new business. It always takes a little while for this to show up in the results, but you're seeing it now. Mining, which is not a huge business for us, has also turned around. The light business continues to perform well also. As I mentioned before, we've talked about this. I think the water business, underneath the covers, has been doing quite well for a while. We're just out of a lot of the exiting business and the other stuff that we were doing. We weren't trying to be optically perfect, but we were doing things that we thought would enhance the business, and the water team has been executing very well.
Great. Thank you.
Our next question comes from the line of John Roberts with UBS. Please proceed with your questions.
Thank you. Healthcare was the second lowest growth segment after textile care. I thought some of the new penalties around hospitals having infection rates and public disclosures of infections were going to help that business accelerate. Maybe you could take us through where you are with that.
Yeah. Well, John, we've talked the last couple of calls, frankly. Healthcare had really a rough start this year. While you're right in the analysis, second slowest growth, I would also say it's considerably better than it was in the first two quarters, which is what we had said we expected to happen, i.e., acceleration in the second half. We're seeing the beginnings of that. To the point of your question around, I'd say incentives in the healthcare industry. They're still not as straightforward as I think all of us would either design if we were designing it. It's simpler, I suppose, if you don't have any of the details to deal with. Right now, the economics still don't line up as straightforwardly as we would like.
What we've adjusted and moved to is also not only talking HAI reduction, where we're doing quite a good job, but also being much more transparent about how these economics show up, even in the world where you are still reimbursing for extra hospital stays and everything else, which is still what's happening. I think the team's getting clearer about how they talk to our prospective customers in light of a game where it's not quite as clear as we would like it to be. Additionally, there's still a lot of room to grow in healthcare. We are using our Anios acquisition in France to expand more aggressively around the world, in many cases, using the Anios brand for several reasons. It's been quite successful. We'll continue to do that.
We're also putting stakes in the ground for Ecolab, if you will, branded business in key markets as well. I remain bullish on the healthcare business. It grows in kind of lumpily, but they're getting some underlying organic traction, which we expect to continue.
Secondly, I thought actually at some point you might discontinue the other segment and move pest elimination into institutional. Instead, now you've added this Colloidal Technologies business unit. Maybe you could tell us where you're going with that.
With Colloidal?
Yeah. You've got now two businesses in other.
Yeah. Some of this is just rule driven from an accounting standpoint. When businesses are different than the other businesses, you need to put them in an other segment. It's SEC Other. What happens is pest, given the nature, there's really not a product component like there is in our other businesses. It finds its way into other. Colloidal is a different business for us as well. It has virtually zero SG&A. I think it's got a total of 25 people on the whole business. As a consequence, it's viewed as an other business as well, and that's why those two are in that segment. It's as simple as that.
Okay. Thank you.
The next question comes from the line of Manav Patnaik with Barclays, please proceed with your questions.
Yeah, thank you. Good afternoon. I just wanted to touch back on the pricing versus cost equation. I think you said you're assuming that the raws get worse, I suppose, or keep increasing next year. You talked about sort of being at the 3% clip on pricing. I guess, compared to historic periods, how high can you push pricing? Is there a point at which you're going to have to find other ways to help offset those raw increases?
Yeah. Well, I would say there certainly is, of course, a ceiling. We have competition out there, and we don't expect that we could probably get 10% pricing for a year or two, but we would be on everybody's blacklist, and ultimately, they would choose to leave us. We've always said that we take a longer-term view on executing pricing. Our customers don't like big, lumpy price increases. We don't either, but we're not immune from them. We can help them manage through it. If you look at history, if you go back, raws this year were up in the 9% range. If you go back, obviously, to the severe 2008, 2009 period, they were up 11% in 2008. We got 3% pricing as a combined unit in both 2008 and in 2009.
Right now, we're going to be, as I said, exiting the year. That was a full-year pricing story. This year it's going to be just around 2% or a little north of 2% with a 3% exit rate. We think there's still upside in pricing from what we delivered in 2018. We are going to continue to push. We have to, given this environment. We don't think we're at the end. We are already seeing exit rates were at 4% in the industrial businesses, around 2% to 3% in institutional. Energy is around the 3% rate, and that's got to move up as we go throughout the year. We're continuing to push, have upside from here, but it's not infinite.
Got it. Just as a follow-up, in terms of other costs like particularly labor rates, so forth, are you seeing any noticeable trends there that maybe add more pressure on top of the raws?
I would say we continue to see wage inflation, but it is not inconsistent with what we've experienced in the past. Traditionally, the way we view this is we use a lot of our, what I'd call, normal productivity work to offset wage costs and healthcare costs and the like. We've continued to do that. We use pricing to really go after spiky costs like raw materials, transportation, et cetera, and make sure that those can serve to offset there. The incremental $200 million that we announced last call is really sort of on top of our normal efforts. It is not in place of our normal efforts.
Got it. Thanks, guys.
Next question is from the line of Laurence Alexander with Jefferies. Please proceed with your questions.
Hello. Could you give a little bit more color on what you're seeing regionally, particularly in Europe? Secondly, to the extent that you're pushing the price in the institutional markets, where you're seeing any areas of actual volume pressure or pushback, if at all, as opposed to just being theoretically you can't do it for a couple of years, are you seeing any pushback currently?
Yeah. The simple answer is there's always pushback whenever you seek price in virtually every situation. It always begets a discussion, and we need to demonstrate why it's important to price and why we are still a valued supplier delivering economic benefit even with the new price. That's always an ongoing discussion. It takes real time from our sales team to go do this and execute it. Also, you get better with practice, and we're in an environment where there's a number of people who are being impacted by price. We're not the only guys in the waiting room, if you will. In terms of what we're seeing regionally, I would say our Europe business continued to perform decently. A little over 3% sales growth is what we're seeing there. We expect that to be more or less the trend going forward.
Certainly slower than balance of the world, but better than, if you will, sort of our darker days in Europe. China, we continue to see strong results. Basically double digits almost across the board. Latin America is relatively strong coming off, I would say a little easier base, but having good results in Latin America. The balance of Asia is doing pretty well as well. We don't see a lot of softness in the business at this point in time. We're not usually a harbinger of this, so we don't take a lot of solace. We're watching and looking. I would also say just underlying trends don't indicate a big downturn in the economy. Certainly not one that would match the volatility in the markets.
Got it. Thank you.
The next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your questions
Thank you. Doug, just on the raw materials, which one is inflated the most to drive the guidance reduction here?
Oh, in the latest period?
Yes.
Well, for the year, we've got propylene, ethylene, and caustic are our stars, if you will. Recently it's caustic continually and basically plastic for pails, et cetera, HDPE.
Got it. Just again, on Laurence's previous question, are there any signs of either de-stocking or slowing in any of your key end markets, more on the industrial side, I'm thinking about here?
No, we've not seen any material change in behavior in our industrial segments.
Thank you very much.
The next question comes from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your questions.
Great. Thanks for taking my question. Doug, last quarter, you talked about the $200 million cost savings plan. At the time, you kind of suggested that you had a sense of it, but it wasn't fully nailed down. It sounds like it's probably still evolving a little bit. I was just hoping you could just give us an update on your thoughts about how well developed the plan is here today, maybe versus last quarter, and where it could be by the end of the year. Then just maybe talk about the phasing. Previously, you suggested that it'd be kind of linear over that three-year path. Has that developed to deliver any more benefits sooner, or are any benefits needed sooner from the SG&A line, given that the raws are being an incremental headwind here?
We have done a lot of work since then. We aren't final, if you will, because we're also looking at ways to tweak the organization to reduce some layers, increase speed of decision-making, which is really the fundamental goal. It will probably also have the benefit of reducing costs and doing other things as well. We're still doing some of that work. In the end, sitting here today, we're quite confident in our ability to deliver. We talked about a third, a third, a third over the 3 years. The first year is not going to be a challenge. If you're going to take a number, you take the over, not the under, but we're still finalizing that. When we announce and give a range for our 2019, we'll be very explicit on what we expect from the $200 million at that time.
Great. Thank you. That's all I had for today.
The next question is from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.
Hi. Thank you, everyone. Just a question on cash flow. It looks like you made up a little progress versus where things were at the second quarter, how do you think you'll straighten the year out? Is the raw material pressure just going to keep pushing working capital higher going into year-end, or something else can happen?
Yeah. Dan gets cash flow.
Thank you. Sure. This is Dan. Thank you. Q3, I think, was a much improved quarter from trends. We saw in the quarter something like a little north of 100% conversion, bringing our full year benefit up to close to 90%. We target about 95%. You're correct, that from a working capital perspective, higher cost tends to inflate inventory. I'll point out also that higher pricing tends to benefit us from a working capital perspective on accounts receivable. I feel good about the quarter. It is an improvement from trend. I think that we feel fine about the fourth quarter and expect to deliver a full-year cash flow more or less in line with our expectation as a comparison to net income. I'm thinking in the maybe $1.3 billion, $1.4 billion range, toward the higher end, I would expect, okay?
Okay. Thank you.
No real surprises and encouraged by Q3.
Thanks. Just as a follow-up, I had a question in energy, and I apologize if you've answered this already, but the supplement talks about in the 4Q comparison against a strong period last year due to some production business sales. Could you just remind us what that was?
Yeah. Last year when we announced the fourth quarter, energy sales in Q4 were 12% last year. It was after like negative two and a four and a five in the prior three quarters. We had said that wasn't a run rate. It included fairly significant, like roughly maybe just a little under half of one-time sales, equipment and other things. I don't have the exact verbiage. A lot of it was even in the Middle East. It wasn't a run rate. We're annualizing against that. If you take that out and look, it would be like high single digits in Q4, which is not inconsistent with what you saw in Q3.
Okay, great. Thanks so much.
The next question is from the line of John McNulty with BMO Capital Markets. Please proceed with your questions.
Yeah, thanks for taking my question. On the $0.75 of raw material headwinds that you expect to see this year, how much of it do you expect to recoup back before or by the end of the year? How much of it is something that we'll see you catch up on in 2019?
Yeah, the $0.75 includes FX as well. That was really raw materials and FX versus our original plan. If you look at year-over-year impacts, I'll get you the exact numbers in a minute. We're going to basically recoup, if you will. DPC versus plan and FX versus plan are around the $0.75, and pricing is going to be just under $0.30 or so over plan. We've upped pricing this year versus what we expected to deliver in response to higher than forecast raw materials and ultimately FX. We weren't able to recoup all of it because it moved very late in the year on us. Ultimately, we think we will recoup all of it. We are already, if you will, our pricing dollar for dollar is over the incremental raw material bill, including in the fourth quarter.
Now we've got to recoup margin, which we always say is typically year two work.
Got it. No, that's helpful. Thinking about the raw materials, it looks like some of the raws that you have exposure to, whether it's caustic or propylene, have actually started to come off a bit, I guess, in the last month or so. How quickly do you see that? Let's assume these prices are for real in terms of how they've dipped a bit. How long before you actually start to see the benefit of that?
Well, it's different in the U.S. than outside the U.S. because the accounting rules are different. In the U.S., it comes through fairly quickly, and outside the U.S., you got inventory.
86.
Yeah, maybe 70, 80. A couple of months.
Got it. Perfect. Thanks very much.
The next question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your questions.
Great. Thank you. Just on energy margins, the recovery is moving in the right direction, but it does appear a little bit slower than many investors were expecting. As you've already taken out the net costs following the volatility the last few years, how should we think about the development of U.S. onshore to offset some of the potential shortfalls across the globe, and even think about the production rebalancing in the Middle East given the potential void of Iranian sanctions? Just what are the best ways to think about your company's specific outlook, given where the energy markets are likely heading into 2019? Thank you.
Yeah. Well, look, you've touched on a few, right? Iran's going to get turned off. Permian will get turned back on ultimately. They're probably the two big shifts. You've got the slow leak in some other markets because they haven't the capital or the ability to maintain production values. I think by and large, it bodes well for us. We don't have significant Iranian share given that we had to walk out, and Permian is an area that we've done well in. As we see this shift, it will bode well for us.
Got it. You did allude to this a little with your comments on Diversey. Given the industry M&A changes over the last few years and the changes in competitive landscape pretty much across a bunch of your major segments, can you just comment on if you believe that these changes have had, in any shape or form, fashion, an effect on the various areas of industry pricing disciplines and/or your ability to act in a timely fashion over the last year or so? Just any color on how that may have factored into the pricing, and if it wasn't a big deal, obviously all good.
Yeah, I would even put the Diversey activity is not inconsistent with history. We've always gone, and they've always been quite price aggressive. In our minds, not always in the most intelligent fashion as we look at P&Ls of customers. It's always easier because you have more information than the person competing for the business because you're doing it. You know what the costs are, you know what the consumption is, and the others are guessing. That's not even new. We've been dealing with this on and off for 30 years, and I would imagine we'll continue to do so. There's only really upside in terms of pricing behavior for most of our competition. I'd say Baker Hughes, as it's come under the GE Energy umbrella, appears to be, I would say, seems like they're pricing more intelligently, based on costs and other things.
I don't know if that's going to last or not. Can't predict. I would also say Suez, we haven't seen dramatic change from Suez.
Great. Thank you very much.
The next question comes from the line of Shlomo Rosenbaum with Stifel. Please proceed with your questions.
Hi. Thank you very much for taking my questions. Hey, Dan, maybe you could help with this. If you leave current FX rates constant from where they are today, what would be the FX headwind to 2019 numbers? Not asking for guidance on anything, but just what does it represent as a headwind to next year?
Yeah. If you just read next year's FX exposure at current spot rates, we would see a headwind of about $0.10. Okay? Plus or minus ±2% to EPS.
Okay, great. What would be the growth rate in the quarter if you normalized for that hurricane that was kind of an easy comp in the third quarter? Would you still be at 7%, or would that have come down to six or something?
Hurricane was probably 60 basis points, so you'd probably end up above six, but probably not rounding to seven.
Okay, great. Thank you.
The next question comes from the line of P.J. Juvekar with Citigroup. Please proceed with your questions.
Hi, this is Scott Goldstein on for PJ. It looks like in textiles care, it's growing meaningfully slower than your other industrials businesses. What are your longer-term expectations for that business, and do you still view it as a core part of the portfolio?
Yeah, we expect textile to accelerate from here. That's a business forecast, sound reasoning behind it. Some is just going through some customer transitions and others, we would expect that business to accelerate. It's going to be a mid-single digits growth business. It's not going to be a business in the 6%-8% organically, it's a good business. Yes, it's part of our portfolio, and we'll continue to invest in it to grow and to win.
Okay, thanks. Just checking, have the tariffs had any impact on how you're thinking about your supply chain or distribution?
Well, we are somewhat fortunate in the tariff world, if anybody is, in that we've historically had a supply chain strategy, which is make where we sell. It was originally born because of mitigating FX. We didn't want foreign exchange to become a strategic issue, right? It's a translation issue, but if you only made in the U.S. and the dollar got strong, you're suddenly not as competitive from a price standpoint. Hence, our strategy to go make in markets or in the currencies we sell in. As a consequence, we don't have big exposure. In China, for instance, like 92% of what we sell in China is made in China. We don't have significant imports into the market that are going to be affected by tariffs. The bigger impact for us will be Brexit. That one, it depends.
We're assuming that it's a hard exit and that we have to fall at the WTO rates, and that's the way that we're managing and looking at it. Anything better than that will mitigate, but I think even there, we don't plan to have this as a big talking point in our quarterly calls.
Okay, got it. Thank you for the detail.
The next question is from the line of Hamzah Mazari with Macquarie Group. Please proceed with your questions.
Good afternoon. Thank you. The first question is just on the paper business. It had a nice ramp. If you could just touch on the sustainability of that growth. Is it largely just a cyclical rebound or anything you're doing differently in that marketplace?
Well, a big piece of the ramp was price. That's a business that has a lot of price plus contracts. You're starting to see the price take up. Where we don't have those contracts, our team has been aggressive, recouping raw material increases that have occurred over the last couple of years. The other half of the sales is volume, that's a tick up as well. That's really been driven by new business and new innovation that's been introduced there that's helped drive successful new volume at both existing and new customers. The team's on the price equation. They know they've got to go back and rebuild margins so that we can continue to invest in new technologies. It benefits everybody in the industry, that's exactly what they're doing right now.
Great. Just a follow-up question on international. Are there any sort of structural reasons why the mix of international shouldn't look like the U.S. longer term, whether it's more institutional, more QSR? Just any big picture thoughts on that. Thank you.
Well, I don't know if it will on average. The U.S. has got an outsized food service market, given its population and compared to, if you will, other markets like US dollars spent per head. With that said, I think institutional is undersized and has low share versus our potential in our non-U.S. markets. It has certainly significant upside from where it is today, but it likely won't be the same percentage of the total enterprise as it is in the U.S. on the balance of the world.
Great. Thank you.
The next question comes from the line of Mike Harrison with Seaport Global. Please proceed with your questions.
Hi, I was wondering if you could talk a little bit about the margin performance in the energy business. There was just a tiny bit of sequential decline despite some improvement in the top line. Can you talk a little bit about some of the puts and takes in the margin performance in energy and also provide some thoughts on the cadence of margin over the next few quarters?
Yeah, the blip would have almost certainly been just propylene. They have fairly sizable exposure to propylene, and so as it moves up and down, you'll see the 10, 20 basis point kind of blips in their margin. The real energy story needs to be continued pricing, recouping raw material input cost inflation. That didn't occur just this year, but also in prior years. The team is on it. They're doing it. They're doing a much better job driving enhanced mix, et cetera, and driving new innovation and customers. All these things will help drive and rebuild margins, which we still believe will be in the middle teens.
I was wondering, going back to the paper conversation, can you comment on how the Georgia-Pacific acquisition has been progressing relative to your expectations? Are you seeing benefits in the paper segment related to some industry consolidation that's happened over the past year as well as the past several years?
Yeah, well, the acquisition you referenced is off to a great start. It's above on virtually every one of our targets. In case the team's listening, this is a year one. We often do this year one. We plan to own it for 40 years. We got to continue the performance. No, it's been off to a good start. In terms of consolidation, I would say generally, the period of consolidation can be unsettling, but typically consolidation in industries benefits us. We prefer consolidating customer sets and fragmented competitive sets. That's almost one of the preconditions for us to thrive. Long-term, we would view that as a positive.
Thanks very much.
Our next question is from the line of Rosemarie Morbelli from Gabelli. Please proceed with your question.
Thank you. Good afternoon, everyone. Well, most of my questions have been answered. Doug, could you talk about the environment for M&A? What are you looking at? I mean, the valuation seems to have come down for a lot of potential properties.
Yeah, I would expect, Rosemarie, that we will have a couple more deals done before year-end. I'd say the environment generally, I would agree with you, seems to be getting a little better. We're going to remain committed to doing smart deals, and this means it's going to be a bit seasonal, not like spring, winter, fall, but maybe there are some years where we're going to be more successful than others because we really don't want to force it by paying too much. We think we're in a position where we can do this, that's the way we view it. With that said, yeah, I would expect that we'll have a few near term. If we look at sort of what we're looking at, who we're talking to, I would say the list is getting better and stronger.
Any particular size that you are targeting in specifically?
Look, I think the only size limit or parameter we have is doing too little of a deal can be a real waste of time and money because it almost takes the same amount of effort, if you will, to buy a $5 million company as a 50 or a 500. We try not to do really tiny deals. Other than that, we don't really have a size preference. The preference really is around, does it make sense strategically? Can we get a return on it? Are we the rightful owner? Those are the kind of the big things that we look at in financial terms. It's a return. We're investing shareholder money. We've got to be able to look at shareholders and say, "You're going to be really happy with this return. It's the best way we can invest the money.
All right. Well, thanks. That is helpful. If you could update us on your technology and digital investments.
Yeah. We have not blinked there at all. In fact, we're investing more this year than last year. I think we're starting to get at a point where it's not going to call for dramatically more money in the near term. We've got to really do a great job with the money we're already investing. Look, we're out in the marketplace with some very large customers. We're learning, developing. As I've said repeatedly, I think the digital world is great for us. We are advantaged. We have 3 million customer sites, virtually all of which are collecting data today, a fraction of which are connected to the cloud, but technically that's not that complicated, and the cost to do it is dropping. We have unique know-how, unique streams of information, and are the only people able to act upon what we learn through the digital world.
Once we find out there are problems in units, we can actually get in there and help our customers fix them. I think that whole combination is a great advantage for us long term, and we're working very hard to make sure we don't squander this advantage.
Great. Thank you very much.
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 third 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. Our best wishes for the rest of the day.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.