Michael J. Monahan - Ecolab, Inc. Douglas M. Baker, Jr. - Ecolab, Inc. Daniel J. Schmechel - Ecolab, Inc..

Gary Bisbee - Bank of America Merrill Lynch Tim M. Mulrooney - William Blair & Co. LLC John Roberts - UBS Securities LLC Manav Patnaik - Barclays Capital, Inc. Laurence Alexander - Jefferies LLC David I. Begleiter - Deutsche Bank Securities, Inc. Andrew John Wittmann - Robert W. Baird & Co., Inc. Vincent Stephen Andrews - Morgan Stanley & Co. LLC John P.

McNulty - BMO Capital Markets (United States) Christopher S. Parkinson - Credit Suisse Securities (USA) LLC Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc. Scott Goldstein - Citigroup Global Markets, Inc. Hamzah Mazari - Macquarie Capital (USA), Inc. Michael Joseph Harrison - Seaport Global Securities LLC Rosemarie Jeanne Morbelli - Gabelli & Company.

Greetings and 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. As a reminder this conference is being recorded.

It is now my pleasure to introduce Mike Monahan, Senior Vice President, External Relations. Thank you Mr. Monahan you may now begin..

Thank you. Hello everyone and welcome to Ecolab's third quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO; and Dan Schmechel, our CFO. A discussion of our results along with our earnings release and the slides referencing the quarter's results and our outlook are available on Ecolab's website at ecolab.com/investor.

Please take a moment to read the cautionary statements on these materials, stating that this teleconference, the discussion and the 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 the 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 reduced tax rate yielded the third quarter's 11% adjusted earnings per share increase.

Moving on to some highlights from the quarter and 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 the lower tax rate yielded 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% to 13% to the $5.20 to $5.30 range as volume and price gains offset the impact of higher delivered product cost and business investments. Fourth quarter adjusted diluted earnings per share are expected to be up 8% to 15% to the $1.49 to $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 and along with cost efficiency actions and a lower tax rate yield 11% to 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. And now here's 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 are 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 onetime 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 continued 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. So 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, but 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. And 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 of 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. So 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?.

Yes, thank you. Thank you. Our first question is from Gary Bisbee with Bank of America Merrill Lynch..

Hey guys. Good afternoon.

So, 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..

Yes, I guess, Gary, I mean 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, year-on-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. And 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 of goods. So, that probably is the best way to answer the question.

Obviously, we're not going to go forecast the year right now. Environment's fairly dynamic, but 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. And then the follow-up, obviously, pricing accelerating has helped revenue. But the last year, you've had much better volume and 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..

Well, 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.

So, 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.

So it ends up to be a very economic story too, which will still resonate if the economy slows. So, yeah, I would expect that the vast majority we will have strong results moving forward, barring any – I don't expect an 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..

Yeah. 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 of the businesses, except Energy, is that they will 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. And 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've been quite aggressive in several accounts. Some, we have frankly allowed the 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. And so, 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.

But 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.

So it's not like we're not continuing to win there, but they've had a couple of big wins because they're doing at a 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 working 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. So we would expect Institutional to be a good performer again next year..

All right. Thanks for all that color. As my follow-up, I will 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?.

Yes, I mean, all of them are performing well. And we had improvement in heavy business which we've been talking about, because heavy team really starting a year ago was really strong and 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 big business for us, has also turned around. And the light business continues to perform well also. And as I mentioned before, I think there's – 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 kind of exiting business and the other stuff that we were doing. We weren't trying to be optically perfect, but we're doing things that we thought would enhance the business and the Water team has been executing very, 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 can take us through kind of where you are with that..

Yes, well, John, as we've talked the last couple of calls frankly, Healthcare had really a rough start this year. And while you're right in the analysis, second lowest 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.

So we're seeing the beginnings of that. To the point of your question around, I'd say incentives in the healthcare industry, there 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.

But 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 HAIC 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 fees and everything else, which is still what's happening.

And I think the team is getting clear 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, a lot of room to grow in Healthcare.

And 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, but 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.

So 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..

And then 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 can tell us where you're going with that?.

With Colloidal?.

Yeah, you've got – you're bulking – you've got now two businesses in other..

Yeah. Well, these are – so some of this is just rule-driven from an accounting standpoint. And when businesses are different than the other businesses, you need to put them in another segment. It's SEC other.

And so what happens is past given the nature, there's really not a product component like there is on 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 like 25 people on the whole business.

And as a consequence, it's viewed as a other business as well and that's why those two are in that segment, it's just 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. So I think you said you're assuming that the raws gets 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? Like is there a point at which you're going to have to find other ways to help offset those raw increases?.

Yes, I mean, I would say there certainly is of course a ceiling. I mean we have competition out there. And we don't expect that we can go get – we can 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.

So 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 can't – we are not immune from them, we can help them manage through it. If you look at history, if you go back, so 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. So 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.

So we think there's still upside in pricing from what we delivered in 2018. And so, we are going to continue to push. We have to, given this environment. So we don't think we're at the end. We are already seeing exit rates. We're 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. So we're continuing to push, have upside from here, but it's not infinite..

Got it.

And just as a follow up, I mean, in terms of other costs, like, particularly labor, wage, so forth, like are you seeing any noticeable, I guess, trends there that may be add more pressure on top of the raws?.

Well, I would say we continue to see wage inflation, but it's 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. And we've continued to do that.

And so, 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's 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? And then secondly, sort of, 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, but are you seeing any pushback currently?.

Well, I mean, the simple answer is there's always pushback whenever you seek price in virtually every situation. And so, it always begets the 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. So that's always an ongoing discussion.

It takes real time from our sales team to go do this and execute, and 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. So we're not the only guys in the waiting room, if you will.

In terms of what we we're seeing regionally, I would say, our Europe business continues 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. So, 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. So, 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, but 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 raw materials, which ones inflated the most to drive the guidance reduction here?.

Oh, so in the latest period?.

Yes..

Well, I mean for the year, we've got propylene, ethylene and caustic are our stars if you will. And recently, it's caustic continually and basically plastic for pails, et cetera, HDPE..

Got it.

And just again on Laurence's previous question, are there any signs of either destocking 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. And at the time, you kind of suggested that you had a sense of it, but it wasn't fully nailed down and it sounds like it's probably still evolving a little bit.

But 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? And then just maybe talk about the phasing; previously you suggested that it'd be kind of linear over that three year path.

But 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?.

Yeah. Well, 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.

So 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 three years. The first year was not going to be a challenge. If you're going to take a number, you take the over and not the under, but we're still finalizing that.

When we announced 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 question..

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.

But 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 the year-end or something else going to happen?.

Yeah, Dan gets cash flow..

Yes. Thank you. Sure. So this is Dan. Yeah, thank you. Q3, I think was a much improved quarter from trends. So 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%. And you're correct, that from a working capital perspective, higher costs tends to inflate inventory.

I'll point out also that higher pricing tends to benefit us from a working capital perspective on accounts receivable. And so, 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 it compares to the net income. And I'm thinking in the maybe $1.3 billion, $1.4 billion range, towards the higher end, I would expect, okay. But no real surprises and encouraged by Q3..

Thanks. And just us a follow-up, I had a question on 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.

Can 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 2% and a 4% and a 5% in the prior three quarters. And we have said that wasn't the run rate, it included fairly significant like roughly maybe just a little under half of one-time sales of equipment and other things.

I don't have the exact verbiage. A lot of those was even in the Middle East. But it wasn't a run rate and 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 the – or by the end of the year? And then how much of it is something that we'll see you catch-up on in 2019?.

Yeah. The $0.75 includes FX as well. So that was really raw materials and FX versus our original plan. If you look at year-on-year impacts, it's going to be – I'll get you the exact numbers in a minute. So we're going to basically recoup if you will.

So DPC versus plan and FX versus plan are around the $0.75 and pricing is just going to be under $0.30 or so over plan. So we've upped pricing this year versus what we expected to deliver in response to higher than forecast raw materials and ultimately FX. But we weren't able to recoup all of it because it moved very late on the year on us.

Ultimately, we think we will recoup all of it. So we are already if you will our pricing dollar for dollar is over the incremental raw material bill, including in the fourth quarter. But now we've got to recoup margin, which we always say is typically year two work..

Got it. No, that's helpful. And then 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? Like how long do we have to wait before – 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. So in the U.S. it comes through fairly quickly. And outside the U.S., you've got inventory....

80 days..

Yeah, maybe 70, 80 – couple of months..

Got it. Prefect. Thanks very much..

The next question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your questions..

Great, thanks 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 over 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 thinking 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 specific outlook, given where the Energy markets are likely heading into 2019? Thank you..

Yes, well I mean look you've touched on a few right. So Iran is going to turned off, Permian will get turned back on ultimately. They're probably the two big shifts. And you have 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. So as we see this shift, it will bode well for us..

Got it. And just you did allude to this a little with your comments on Diversey.

But given that 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 or fashion an effect on the various areas of industry pricing discipline 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..

Yes. I'd even put the Diversey activity is not inconsistent with history. So 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.

But 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. So that's not even new. I mean we've been dealing with this on and off for 30 years. And I would imagine, we'll continue to do so.

Or I mean the only really – there's only really upside in terms of pricing behavior from most of our competition. I'd say Baker Hughes has come under kind of the GE Energy umbrella, appears to be I would say more priced, 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. And I'd 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? So not asking for guidance or anything, but just what does it represent as a headwind to next year?.

Yes. So if you just read next year's FX exposure at current spot rates, we would see a headwind of about $0.10, okay, so plus or minus 2% of EPS..

Okay great.

And then 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 6% or something?.

Hurricane was probably 60 basis points. So, you'd probably end up above 6%, but probably not rounding to 7%..

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 P.J. So, it looks like in Textiles Care, it's growing meaningfully slower than your other Industrials businesses.

So, what are your longer term expectations for that business and do you still view it as core part of the portfolio?.

We expect Textile to accelerate from here. That's a business forecast sound reasoning behind it. Some was just going through some customer transitions and others, but we would expect that business to accelerate. But it's going to be a mid-single-digits growth business.

It's not going to be a business in the 6% to 8% organically, but 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.

And 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 and 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.

So, we don't have significant imports into the market that are going to be affected by tariffs. The bigger impact for us will be British exit and that one it depends. So, we're assuming that it's a hard exit and that we have to fall with the WTO rates and that's the way that we are managing and looking at it.

Anything better than that we'll 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, big piece of the ramp was price. That's a business that has a lot of price-plus contracts. You're starting to see price tick 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, so that's a tick up as well.

And 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. So, the team's on the price equation; they know they've got to go back and rebuild margin, so that we can continue to invest in new technologies.

It benefits everybody in the industry and that's exactly what they're doing right now..

Great. And 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. You have – the U.S. has got an outsized food service market given its population and compared to, if you will, other markets like 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.

So, 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?.

Yes, I mean 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 basis point, 20 basis point kind of blips in their margin. I mean the real Energy story needs to be continued pricing, recouping raw material input cost inflation.

It 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..

All right.

And then was wondering going back to the paper conversation, can you comment on how the Georgia-Pacific acquisition has been progressing relative to your expectations? And are you seeing benefits in the paper segments related to some industry consolidation that's happened over the past year as well as the past several years?.

Yes. Well, the acquisition you referenced is off to a great start. So, it's above on virtually every one of our targets. In case the team's listening, this is the year one and we often do this year one, and we plan to own it for 40 years. So we got to continue the performance. But it's been off to a good start.

And 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. It's almost one of the preconditions for us to thrive. And so long-term we would view that as a positive..

Thanks very much..

Our next question is from the line of Rosemarie Morbelli of 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. And I'd say the environment generally I would agree these 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.

There may be – 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. And we think we're in a position where we can do this. So that's the way we view it. With that said, yeah, I would expect that we'll have a few near term.

And 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?.

I mean, 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 million or a $500 million. So we try not to do really tiny deals.

Other than that we don't really have a size, preference-to-preference really is around, does it makes sense strategically, can we get a return on it, are we their rightful owner. I mean those are 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. Thanks. That is helpful.

And if you could update us on your technology and digital investments?.

Yeah. We've 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.

But we've had – 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, all of which, or virtually all of which are collecting data today, a fraction of which are connected to the cloud, but technically that's not that complicated that cost to do it. It's dropping.

We have unique knowhow, unique streams of information and are the only people able to act upon what we've learned through the digital world. So 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..