Greetings, and welcome to Ecolab First Quarter 2019 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] 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, and 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 Web site 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, and actual results could differ materially from those projected.

Factors that could cause actual results to differ are described under the Risk Factor section and 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, and product innovation lead the sales and operating income growth, which along with cost efficiency actions of reduced tax rate and lower interest expenses yielded the first quarter's 13% 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 3% as the industrial and other segments both showed strong sales gains, and along with modest growth in 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 lead by double-digit gains in the industrial, energy, and other segments.

Net operating income increase drove 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 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, and improve rates across all of our segments.

Our digital investments are developing well, and we look for them to add an expanding range of new actionable insights for 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% to 14% to the $5.80 to $6 range as volume and price gains and cost efficiency benefits more than offset the impact of moderating deliberate 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 to $1.46 range, up 7% to 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 deliberate product cost increases and unfavorable currency exchange and along with cost efficiency actions yield a 10% to 14% adjust 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. And now here is Doug Baker with some comments..

Thanks Mike and hello. So 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 were very strong so were margins as pricing is overcoming inflationary pressures that we have been feeling leading to margin recovery.

Energy also had strong margin recovery even with predicted soft sells of -2%. Our other segments, our other specialty businesses QSR and FRS were strong also. The only disappointing news is Institutional whose sales were weaker than expected. The underlying sales were 4% 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, it happens frequently, and the exited business we discussed last quarter converted quicker than we had forecast.

We expect the Institutional business to show improvement and reported an underlying sales through the year particularly in the second half. So, as we finished the first quarter and move into the balance of the year, we are well-positioned we believe. The heaviest lifting of our U.S.

SAP implement is behind us with our fourth and final supply chain wave completed in the first quarter of '19. Our pricing, cost savings, innovation, digital, and talent initiatives are all on track. A 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 ending every quarter and most importantly leave the year with good momentum as well. So with that, I am 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 Association Show in Chicago on Monday May 20. Looking further ahead, we also plan to hold our 2019 Investor Day on Thursday September 5. If you have any questions, please contact our office.

Operator, would you please begin the question-and-answer period?.

Yes, thank you. [Operator Instructions] 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 filing in for Gary Bisbee.

Can you discuss the revenue trends in Europe particularly in your core segments, Institutional and Industrial?.

Yes. We had a strong quarter in Industrial than Institutional. Industrial was organic 5 and Institutional was down a point. QSR had a fairly strong quarter, so if we put them together you end up with a little better answer. Institutional, Europe, I think is an area where we feel like we are doing the right things to improve this.

We put a new GM in Europe late last year. The new GM, Martin [indiscernible] starting Institutional; he was the GM who turned around Pest [ph] North America. We have added a sales field leadership position in Europe reporting to Martin. And collectively, that team is focusing on three things, localizing innovation.

We have got too global in much of our institutional approach. We want to make sure that we are doing the right things and making sure our innovation is tailored for local approach. We are also enhancing field execution discipline. This is really the key role in the sale field leadership position.

We are also adding sales fire power by converting some field resources we are little heavy and converting them into corporate account selling resources. Obviously, it's not same bodies in every case, but it's the same money..

And then as a 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 hiring -- average hiring on the sales force? Chances are getting increased productivity out of sales force as well of just hiring more people? Thank you..

Yes, over 2018, we added about 3% in sales and service resources last year. So, we feel we are in a good position to take care of the growth that we are 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 question..

Thanks, wondering if you could touch on Life Sciences as it continued outperform the market very nicely there, Doug, maybe talk a bit about the runway for growth.

Any changes you are seeing in the competitive there?.

Yes. No, the Life Sciences business continues to do well. And while it was performing decently before we, if you will, created a focused Life Sciences business, it clearly has kicked into a higher gear. And we've averaged double digit since that point in time. Look, we love that market. So the market is global. It's consolidated many cents.

If you think about the customer set, 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 front. We have very good clean room technology.

We have world class CIP technology so the lessons that we have learnt over the years in food & beverage and increasingly in other industrial applications perfectly applies here. And then, 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.

And so, we are leveraging these advantages quite successfully growing that business. We made an acquisition as you will recall in U.K. Bioquell just fourth quarter is when we closed. And so that's going to also give us additional technology and a new entry point, if you will, into this market.

Finally, we just added manufacturing capability in North America where we have now registered products. So, it's going to open up in much broader swath of the U.S. market. And we have been able to compete against previously.

That will in essence change competitive environment for us, I don't think for the worse simply because we will be able to go after bigger part of the market..

Got it. That's helpful. And just a follow-up, in terms of you mentioned the U.K.

acquisition, is there a pipeline of potential targets in that space?.

Absolutely. And I would say it's relatively new space for us. And so it's not an area that we probably mined as heavily as we have others in the past. So, yes, there is a nice long list. Obviously, it's going 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 that -- 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?.

Yes. Clearly, it 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, and 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. So this happens almost every year in a quarter, we have some conversation.

Last year, in the first quarter, our conversation was the opposite. Distributors had built inventory during that quarter and we talked about how the reporting 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 expect to end the year in a 5% run rate.

So 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 [indiscernible] low margin business. However, it was worse than we expected which we talked about in my opening remarks and Mike referred to.

So 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 the timing issue. The distributors did drop inventory in the quarter, which happened typically we'll see a rebalancing in that come back and follow-on quarters, I can't predict if that's Q2 or Q3.

It's probably one of those two. In the final piece, I would describe for lack of a better term is the fog of war, and this is related to the SAP U.S. implementation. This doesn't mean we lost consumption because of SAP -- we didn't. But when you do these implementations, and I'll just remind you, we had four waves in the U.S.

[technical difficulty] a couple of months ago. The first wave was the February before and wave three was in quarter four. And 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 cutover. 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. But as a consequence after these waves was all this rebalancing activity. And so it's noisy short-term and hard to go figure out exactly what's happening..

So when we look at all the underlying things, pricing, new 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 loss is annualized the distributor inventory is rebalanced, and the SAP implementation costs which are not insignificant by the way and in 70% hit institutional are also recouped. So, there's some natural like margin lift as we move through this just as we start getting through this noisy period. 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. So 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 a strong business as it always is..

So when we look at all the underlying things, pricing, new 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 loss is annualized the distributor inventory is rebalanced, and the SAP implementation costs which are not insignificant by the way and in 70% hit institutional are also recouped. So, there's some natural like margin lift as we move through this just as we start getting through this noisy period. 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. So 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 a strong business as it always is..

That's super helpful with the color.

Maybe just along the same lines on industrial, like, should we think of that 7% growth is sustainable or maybe there's some timing in, it might sort of stabilize later?.

Yes, 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 right 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 and beverage rate, 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 turned into big sales with big players.

Now annualize again some of these sales in quarter, so every quarter is not going to be a seven organic. But with that said, we expect to have a very strong year in F&B and a very strong year in water. So it's 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 and 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.

And so, 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. But 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.

So, 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. So we just have better visibility and a better and a more easier, if you will kind of foundation to run on.

So those are not 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, so 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% to 5% kind of run rate? Is that a fair way to think about it and secondly can you give a little bit of flavor about colloidal and how long you think that can sustain a double-digit growth rate?.

Yes, 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. But 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, yes I would say there's really not a caveat because if you want to say do we expect to be at a 4% to 5% run rate if on December 31, 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.

So I think that would be a comfortable yes that we would exit the year at that run rate because of that..

Okay. And 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 sets or are we going to go through one of these periodic refresh and refocus my calls.

Can you just give us a sense for where is your rationale on that?.

I would say we re-look at comp every year and make minor adjustments almost every year.

And there are episodic times where we go through major adjustment in a given business meaning we went through one in past about three years ago quite successfully I would add you could even you could even see it in the business but we change a 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 just and we'll do that in a way like we did with past where I don't think it's going to be visible to anybody except those in the business.

You know we want great people. We want great people the incentive to do the right thing and also incentive enough where they want to continue to stay here and can make enough money to make a career out of it. And so we always have evolutionary change around here and I wouldn't there's nothing on the horizon that I would say would be noteworthy..

And maybe if you wouldn't mind just one last one on health care is there a reason why the business model there hasn't flexed more in response to this the disappointing growth rates.

I mean like why it hasn't evolved into like a partnership with an insurance company or some kind of other way to get an end run around the bottlenecks that you've seen in terms of the purchasing managers..

Yes, well look we've certainly explored a bunch of different things here. Here's what I would say. You know 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 HAIC around all our 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 the U.S. is just one of portfolio mix.

These programs are still relatively small versus what I'd call the historic product approach. And 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.

And what you'll see is that sales will reflect that - but that just is going to take some time and the team I think is doing exactly the right thinking and after that but that is having good uptake.

In Europe our mix is a little bit better and in Europe we expect to have mid single digit, low single digit organic growth rate, [indiscernible] 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.

So I would say underneath the covers we think the healthcare business is more right than wrong. It's certainly we would like to accelerate it. We would like to see faster better results too. But 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 with spin around customer buying patterns shifting and maybe moving a bit away from 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 the second half? Or do you have pretty good visibility into the sales growth there?.

Yes. The energy quarter if you will -- the soft sales of negative 2%, I mean -- we expected it to be flattish coming into this quarter -- plus or minus.

And so the 2% to us what kind of weather at plus 2's then minus 2, no doubt about it but it was around where we expected it to be, it's not the easiest business to forecast and really we expected these types of top line results for two reasons. One there is a dramatic reduction in just activity, a lot of this is occurring in Permian.

I mean if you look at others in this business you're going to see -- I would say even lower sales rates than we had. And so we're not alone. It'd 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 and 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.

So it's not a change in buying pattern, it's not a change and 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. And most importantly, even in the first quarter with negative 2%, with double-digit LI 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 is continuing and now is being coupled with excellent cost savings efforts as well impacting both gross profit and SG&A.

So we expect mid-single digits in this business for the year top line, and outstanding margin recovery driving even much better live results for the year as well. So I'm not, 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. And just a quick follow-up on around the energy spend. 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?.

Yes, $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 question..

Thank you. Thank you, Doug. You have new competitors, the last six to nine months in water and institutional.

How are they acting in the marketplace?.

Well, I guess our new competitor and institutional would be new owner..

New owner, yes, I'm sorry..

Yes. And I would say they're acting like they've always acted. So I don't, we really don't see a significant difference, it 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 anytime 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. And we don't think that's smart to stay in those situations.

And 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 a 100% but a fairly high percentage. And what we want to make sure that we do is maintain our ability to do a great job for customers.

We are there for customers when they need us and we've got to be able to make money so that we continue to invest in innovation, and digital and all the like, and so we got to be play a disciplined game, as well, and that's the story there. On the water side, you know, GE Water is known by SUEZ.

I don't know that there's, a dramatic difference day-to-day. We were, we thought we are well positioned against GE Water. And I'm not, 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.

So I don't think our competitive environment has really dramatically changed one way or another..

Very good and just selling, you delivered product costs. I know there'll be migrating of the year.

What were they up year-over-year in Q1, Doug, and what should that be up by the end of the year on a quarter or maybe on a Q4 over prior year basis?.

Yes, we're forecasting 3% to 4% inflation for the year. You know, I'll be honest, for the first quarter was, the most significant year-on-year 5 plus probably percent increase in the first quarter, but at a base for two reasons. I mean, 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 forecasts this year. We've held that forecast last year, we got burned on raw materials. The indices we follow, we are 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 and 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 were still need to work a little bit harder.

And then just within institutional is price flattered at all by the exit of the low margin businesses in any meaningful way?.

No, but they would show up in for us in more mix and it would have an 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.

And so, it still is around the 3% rate, industrial had the strongest price number they needed because one they were probably the furthest behind and have been playing catch up and doing a very good job doing it but they got a couple of years a big raw material inflation numbers in their business and they're working to recover those and 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 in rock significantly with raw materials as some of our other businesses do, partisan mix of the raw materials in part is solids and the other technology that they've deployed over the years and so they've got a lower more like a two price if you will year-on-year and energy was also 3% in the quarter as well, energy also obviously see significant plays and 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 we certainly our goal isn't to lose margin either as a result of this, we'll expand margins through our own efforts internally i.e. leveraging the SAP implementation and other work to help improve margin and or innovation but that that's where we are on price.

I would say team is doing a very good job in a very, it's always hard..

And 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 of the books and stuff in the conversations with the distributor customers is that correct?.

Yes, we don't expect. I mean look we don't control and absolutely obviously, if I went on history and we go through this literally every year in a quarter and obviously when it helps us nobody remembers it and when it hurts us you don't remember what the bounces back.

And 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 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 question..

Hey, good afternoon. Thank you.

My first question is any update you can provide as to your circling the customer initiative, specifically which verticals it seems like food and beverage is one which may be sort of optimized in terms of selling your entire product suite to corporate clients and where you think there's room to sort of improve that?.

Yes, look it's been a key part of our strategy and a key part of our success particularly in industrial as we put Nalco, I mean, 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. And if you look at what's occurred in F&B over the last six years, it's been really amazing.

And if you look at the brewery business in particular, how we've been able to very successfully marry water in our F&B cleaning and place, food safety technologies together to create outsized value for customers, it's driven share and 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 lead us to understand other parts of the pest business like fumigation, and it's then lead 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.

So that's a great example of how circle the customer drives value for customer's share for the company and also opens the door to new opportunities as well. There are other examples. I mean, I can do -- we're watching technology being leveraged in QSR and in some instances in our food retail business, coupling with the institutional capabilities.

I mean, there's plenty more, but I don't want to take up too much more time..

No, that's helpful, and just a follow-up.

On health care -- and you may have touched on this earlier in a question, but specifically, does your go-to-market strategy in that segment need to change? Specifically, you know, more of a C-suite type sale? Are you just talking to the wrong people in health care? I'm just curious around go-to-market, if that's a drag at all on growth.

So you may have touched on this, but any color there? Thank you..

No, I think we talked health care earlier. So I'll just sum this like I think the way -- we've really focused strategically on program selling there. And the programs that we have out in the market are growing and we're having success selling them.

And those are programs around room cleaning and HAIC reduction, operating theater, if you will, changeover and also better efficacy and then also in the central, and both programs are working and growing. Now, the issue which is principally U.S. is they're just -- they're still a relatively small piece of the total portfolio.

So that failed to sort of mask if you will, by the product sales that represents the balance of the portfolio where you don't have the same strategic advantages that we have in program selling.

So our nose is to the grindstone, sell programs, keep focusing, the portfolio will shift overtime, because it's growing at 3x, 4x faster than the others -- we know what will happen and then you'll start seeing the sales come through, but that's our strategic focus and there we are -- this is 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 we're -- 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. And so, moving on to Tim Mulrooney with William Blair..

Good afternoon..

Hello..

So 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 numbers are so strong.

So just curious if the market is getting better or worse or about the same?.

Yes, look our China business, overall, was mid singles growth -- 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. And 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 was down more dramatically. They're not making as much corrugated for export shipments in the meantime as we go through this. So 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, but even barring that as we look at the progression and everything else, we think we got more good and bad net 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 time, it was actually lower than the last year despite revenue growth.

Is that primarily the result of your cost savings initiative and do you expect a similar dynamic through the remainder of the year?.

Yes, I would say SG&A certainly we have, strong cost savings initiatives in place. We would have said in the first quarter probably delivered about 20 million bucks, which is on page to the 80 that we've talked about.

For a handicap the year, we probably have upside and the cost savings side of the initiative pile in terms of you need some upside because you never know what's going to happen and other things like FX, et cetera. So yes, those are driving it.

We're also leveraging technology in a number of parts of our business as we go forward, and this is also enabling us to do more via each person. So it's a combination of things but cost saving certainly is a driver..

Okay. Thank you..

Thank you. The next question comes from the line of John McNulty with BMO Capital Markets..

Yes, thanks for taking my question. A quick or one or two of them, one on the raw material front, where are the buckets that you're actually seeing the inflation because it does seem a little bit counterintuitive, given oil coming off the way that it has that you are forecasting something in kind of the low-to-mid single digits for the year.

So maybe help us to understand where you're seeing some of those pressures..

Yes, well, oil year-on-year is up nearly 50%. So, it's you know, we got to go compare back to Q1 last year. That's what our comparison is here.

But 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., but we had inflation also in other markets, Europe in particular. So, our two biggest markets, if you will, so the number of areas where there has been inflation in raw materials.

And you know, I would say last year was significant it followed a fairly significant year, the year before. So as you kind of a two-year run, we are forecasting, moderation and the inflation rate, but not deflation this year. We still think that's the right forecast. And we hope we are on..

Got it. And then it's been a couple months since you announced the split or potential 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?.

Yes, 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.

So when you look at your various platforms, what are the largest opportunities to improve margins over the long-term outside of simply price cost is suppressed, perhaps shifting more even more, even more I'd say to us service model and just, I know institutional in Europe has clearly been a longer term opportunity, but where are the other ones that long-term you know guys should be thinking about? Thank you..

Yes, look, I think there are a number of areas. I mean, you started in Europe and we had a 3% OI margin in Europe and are now nine and knocking on double-digit. And we've done all that over 7, 8-year period of time. And I would say the opportunities that existed there still exist and they exist everywhere else.

And so, as we now have SAP implemented through our supply chain and our finance backbone, and in North America, we now have visibility and different visibility into the U.S. markets. And we've had ever via ERP. I mean, it's replacing a system called Collinet [ph], which we think is 40 years old, but we can't find any marker on the box.

So, let me just say our visibility is enhanced significantly. So we would expect there's significant savings in supply chain. The -- if you will, kind of free channels throughout North America. The pricing on those channels has changed dramatically over the last 2 years.

We know that we've got to recognize that in the way that we shift supply or manufacturing in plants and 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 shift the volume we're shipping today.

So 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, we reduce raw materials and end up with more scale and buying.

And so 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 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. So we talk about 50 to 75 basis points in 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 those 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 and margin build..

And yes 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 were unsettled. And with that often comes opportunity certainly in the U.K. but I would also say on the continent in terms of Asia you know I mean the challenge in Asia as 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 an integrated and then culturally and this isn't the Asian culture just make sure it is a company what's the company's culture and how it been built in terms of how it sells and creates value et cetera.

So there, you know, we've got to be make sure that it's a company that we would have a right to own and run as we go forward. Generally I guess you know I think or we're going to enter a period where you know acquisitions of even size are going to make sense again. I know it'll happen I don't know exactly when it's going to happen.

But being smart about the price you pay is always a good idea. And it proves out over time we believe that value is created through return on invested capital and our ability to generate cash.

And 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 and the answer is yes we're all in it 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. I 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, really outside of Latin America, nothing's really much to write home about..

Yes. Mike I would say I kind of agree I think you know the -- I would say this I don't think the foot traffic anywhere is going to impact our business. It's neither dramatically.

I mean you know the places where you got fast, fast growth and food services Asia and you know 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.

I mean it's a business it's already growing in the teens but it should do better. And we're working to do that. In the U.S. your foot traffic seems to have been soft my whole career and you know yet every time I walk into a restaurant it seems to be full. So I can't quite get over these two problems.

And you know but 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. So until we have 100 share we're not going to talk about foot traffic is our problem..

All right.

And then when I also ask about the strength that you're seeing in food and beverage are we seeing any improvement at all in the underlying market there or is it really just share gain that we're still capturing?.

That's principally driven by share gain. I mean people are still eating obviously but you know you've got some markets that are still fighting through some challenges.

But you know the team's done a very good job for all the reasons I discussed earlier partnering with water and Pepsi et cetera driving outsized value which is leading to some very significant wins..

All right thanks very much..

Next question is from the line of Rosemarie Morbelli with G. Research. Proceed with your questions..

Thank you. Good afternoon everyone. Doug I was wondering if you could give us a little more detail on how 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. So what changes have you made?>.

I think in a couple of areas. So 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 part 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 a around service custom designed for those concepts not maybe the same exact service package that we've had in other markets so designed for China.

So we've invested more if you will on innovation resources in China on digital for China resources in China, organize our constructive 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.

So they've been a number of steps and most notably increased resources. And so 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.

But as we look at it we just thought the way we were structured and the way we were resource was a hindrance if you will not - an offensive weapon and we wanted to change that..

Okay.

And then looking at -- now you have your SAP more or less internationally installed, so now that you have this, can you see the potential benefit from the restructuring to be above the 325 million that you have initially estimated?.

Yes I wouldn't, I mean look, 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. But we're not in a position right now to increase our estimate of those.

I mean we just took it up 125 million from 200 -- 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 and if you will, Ecolab ex spin. And so I think it positions as well.

And on the spin side there'll be more than able to cover their costs of building the kind of public company infrastructure that they need to build which they estimated 35. So I think we're in good shape there, if we can do more we will. It behooves us and the shareholders and that's what we're paid to do..

Thanks and 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?.

Oh yes. Bioquell we did close. I mean we've close but we're going through a competitive review and you know I would say right now you know we're working with the authorities and in the appropriate way and 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 has been a real bright spot in global institutional another good quarter and you cited I believe some business wins I saw also that second quarter may slow down a bit on new customer rollouts but still a solid year.

Please elaborate a little bit on this sub-segment, what is going on with the new business wins in some of these initiatives that you've highlighted in the release. Thanks..

Yes, 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 cost which has really been borne principally in the institutional side of the equation.

And so you know that starts bearing fruit. I think you're going to see enhanced margin as well as we go forward. So there are a number of large opportunities that exist both in QSR and as far as U.S. and around the world that I think our team is doing a good job targeting and getting after. There are occasions.

So we give you a heads up on Q2 that they may have slower than current run rate sales for a quarter that's on a 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 you know and when you lap that it's tough to replicate it. So, we just try to give fair warning that occurs in many of our businesses occasionally through quarters throughout the year..

Thanks. And one more if I could. The CapEx and free cash flow a little a little lower this year in the first quarter than last year I guess you last year a bit of a unique compier but just 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 so, yes, you're right, it was annualized and first of all in the first quarter of '19 against a very strong performance last year in which we grew the business but consumed almost nothing in the way of incremental cash flow. So part of the year-on-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. So 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.

So 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 question..

Hi. Thank you. This is [indiscernible] on for PJ. In water, could you just discuss the growth profiles underlying and in light industry versus heavy industry. And perhaps provide an update on 3D TRASAR penetration..

Yes, they were very close in fact. Not a big differentiation in growth rates between heavy and light.

So both performed quite well and we expect both to perform well for the year, terms of 3D TRASAR unit penetration at this point time, I mean we're nearing 40,000 units outstanding if we give you an exact number if it's important if you want to call Mike or Andy..

Okay. And then secondly your first quarter volume growth to 1% is kind of lagging the overall fiscal year '18 with 4%.

How do you see that going forward? And do you expect price to make up delta?.

Talking about - the 1% for the company?.

Yes, 1% of the first quarter versus 4% for the full-year '18..

Yes, I mean the 1% was clearly impacted also by FX and FX is going to be a particular challenge in the first quarter and second quarter, but at current rates and forecast not a significant challenge in the second-half. So, some of it's just that. The other we talked, institutional, which we expect to improve, and energy 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 available for replay on our Web site. Thank you for your time and participation, and our best wishes for the rest of the day..

Thank you for participation. Today's conference has concluded. You may now disconnect your lines at this time, and have a wonderful day..