Greetings and welcome to the Ecolab Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A 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 your host, Mr. Mike Monahan, Senior Vice President, External Relations for Ecolab. Thank you. You may now begin.

Thank you. Hello, everyone, and welcome to Ecolab’s fourth quarter conference call. With me today is Doug Baker, Ecolab’s Chairman and CEO; and Dan Schmechel, our Chief Financial Officer. 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 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, Ecolab’s strong growth momentum and double-digit adjusted earnings per share growth continued in the fourth quarter. New business gains, accelerating pricing and product innovation drove strong fourth quarter acquisition adjusted fixed currency sales and operating income growth, which along with cost efficiency actions and reduced tax rate, yielded the fourth quarter’s 12% adjusted diluted 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 6%. Adjusted fixed currency operating income rose 7%, continuing the acceleration shown throughout 2018. The operating income gain, along with a lower tax rate yielded the 12% increase in adjusted diluted EPS, continuing the double-digit quarterly growth trends recorded throughout 2018. 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…

Thanks, Mike, and hello. We’ve got – I’ve got a couple of comments and I’m going to keep it brief and maybe a bit repetitive. If we look at 2019, we enter with really quite strong momentum. Q4 was solid in the positive sense of the word. We had 6% organic growth, driven in part by strong pricing, but also very solid volume. This is driven by strong new business, which we really enjoyed all year, including in the fourth quarter, we saw improving OI throughout the year and double-digit EPS in the fourth quarter and for the year as well. So as a consequence, we project 2019 to be very good as well. We’re forecasting a 10% to 14% full-year adjusted EPS range, 8% to 16% Q1 range. The year is really going to be driven by this formula: continued good volume and pricing; a growing benefit from our accelerate plans; and less raw material headwinds, underscore less. They aren’t favorable, they’re just growing slower than they were in 2018, or that’s our projection. Importantly, we’ll continue to invest in systems, digital and key growth innovation throughout the year, and our success driver really fundamentally remains the same. And I would say, importantly, the story we bring to our customers is an important story in both good and not so good economic times. So we know when we have great teams driving our great business model, which we define as best results at lowest cost in the environmental impact. This is what drives great financials for our shareholders and it’s exactly what we’re focused on. So if there’s any shout out that is deserved, it’s really – I’m quite pleased with the momentum we enter 2019 and it’s really a testament to our teams who have been executing very well out in the field. So with that, I’ll turn it back to Mike for Q&A.

Thanks, Doug. That concludes our formal remarks. As a final note before we start Q&A, we plan to hold our annual tour of our booth of 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?

Thank you. We will now be conducting a question-and-answer session. We ask that you please limit yourself to one question and one brief follow-up question per caller, so that others have a chance to participate. [Operator Instructions] Our first question comes from the line of Gary Bisbee with Bank of America Merrill Lynch. Please proceed with your question.

Hey, guys, good afternoon. So I guess, the first question for me, obviously, pricing has really picked up and that’s been helpful to revenue growth. But as we think about – but in fairness, volume also had its best year in a number of years. So as you think about 2019, what is the cadence look like? I assume, as you start to lap the pricing, you’re unlikely to get those types of gains again on top of what you’ve got now. So is it reasonable to think that the revenue growth decelerates a bit as we move into the year, or is your optimism around volume is such that, this recent trend is sustainable on the top line? Thank you.

We believe contributions from volume and pricing in 2019 are going to be very similar to those that we saw in 2018. And so while you’ve got raw material inflation slowing, we still forecast, it’s going to be up year-on-year. But I don’t even think it’s like spot market pricing, that’s what’s really driving our conversation with customers. Fundamentally, we don’t try to match price and inflation in any given quarter. We want to do it at a slower pace, as we’ve talked in the past, simply because it’s better for our customers. And so we’re still in the recoup mode, if you will, from a pricing standpoint for increases that we saw in parts of 2017 and all the way through 2018 and the continued forecasted increases we see in 2019. So we would expect fairly steady, if you will, collective sales growth throughout the year. We don’t think that there is a big hockey stick, i.e., it’s much faster in the first-half versus second or vice versa.

And then a quick follow-up. I guess, just wanted to probe your ability to prepare for the spin. Does this have any impact on either the bolt-on M&A strategy or anything else as you divert people to focus on that, or are you think that’s not going to be a huge deal as we think about what the executive team is working on over the next 12 to 18 months? Thank you.

Yes, I mean, it’s fair. It’s absolutely a large project. I think, we worked hard to understand, if you will, where the shadow falls from this project. It will not preclude us from continuing our path of bolt-on M&A. We have a very good pipeline right now. What we create when we’re in these situations and I think we’ve done it quite successfully in the past is, we create and kind of segregate teams that are going to go focus on this. We will utilize outside services, where they are equal or better than what we can do internally as well, so that we don’t drain capacity needlessly here. If you recall, when we had, say, even the Nalco integration, we created a standalone team. We gave them a charter. They executed excellently. And if you also recall, we continue to drive very successfully sales growth and margin growth during that period of time in the rest of the businesses.

Thank you.

Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

Hi. This is actually Greg calling on for Manav. I just want to hit on the raw material assumptions a little bit more. Just given what happened last year in terms of the third-party assumptions ending up a little bit worse, just wondering what level of conservatism you’ve put into those assumptions?

Yes. No, we would follow the philosophy, I think, you’re advocating. We’ll make a new mistake this year. So you’re right. I mean, if you went on the indices last year, which is basically how we formulate forecasts, it would have suggested, you would have had a much lower level of inflation in raw materials in 2018 than we actually saw. If you look at our forecast in indices, our forecast for raw materials is slightly above the indices at this point in time. We also understand that the indices are always going to be wrong one way or another, but we are certainly not being overly aggressive. We don’t believe with our raw material forecast. We’ll see what actually transpires. Obviously, if it ramps up, we have proven that we can ramp up pricing if we need to in that eventuality and that’s exactly what we would do if we needed to. And obviously, we’d probably step on the accelerate – accelerator, too.

Okay. And then I just wanted to quickly ask about how you think about the growth trajectory for the Downstream Energy business? I think in the past, a lot of the secular growth drivers you’ve talked about for that business focus more on the upstream side. So if you could just touch on some of the drivers that have driven the nice growth on the downstream side, that would be appreciated? Thanks.

Yes. The downstream business if you look at cyclicality, either on growth or income, is one of the steadiest businesses we have in our portfolio, not just in energy, but in total. And it’s a very steady mid single-digit top line growth business. There are a number of things that drive it. We are a global player in that market. You certainly still have significant economic growth in key parts of the world that typically drives energy consumption. The other aspect of production out of the refineries and petrochemicals, obviously, plastics. And while there are certainly pressure on some consumer plastics, plastics are absolutely critical to a number of the key sustainability initiatives. It’s a way that you lightweight materials, the way you lightweight vehicles, et cetera, is going to be through fundamentally plastics. And so there’s very steady demand story we believe as we look at this business. If you look at the past, it would also indicate that the business is quite resilient, both the end market and ours.

Thank you. Our next question comes from the line of Chip Moore with Canaccord Genuity. Please proceed with your question.

Thanks. Doug, maybe you can talk a bit more about competitive environment by geography and institutional, in particular, and then where you are exiting some lower-margin business, maybe you can just help to quantify that for us as a headwind in 2019? Thanks.

Yes. I’d say the – I don’t know what the competitive environment has dramatically changed by region. Certainly, Europe remains the most competitive challenged market that we compete in from an institutional standpoint. It was and is and will be we think for a considerable period of time. In terms of the low-margin comment, yes, we ended up and we’ve been through this a number of times, where through quite aggressive bids that we determined weren’t smart to match. We have exited loss, whatever word you want to use, some business, principally in the contract catering arena. This will have some top line impact, probably less impact on the bottom line, simply because it wasn’t high-margin business to begin with, and then we faced very aggressive competitive bids. If you go back, this isn’t very different than the situation we faced in food and beverage for a considerable period of time, where a number of instances, we decided not to match bids. The business went away for a period of time and virtually all. I can think of one piece of business that we have not resecured after going through that in the food and beverage market. Obviously, we will work to prove that we’re the right partner for these companies going forward, but we can’t do business when it’s going to be at a very problematic financial situation. The reason we’re in business is to do good for society and for our customers, but also – or by the way, make money. And we do not ever see the idea of losing money as a strategic benefit. And so if we can’t prove, we’ll get costs right and do other things. This is not going to be significant. We think institutional this year is going to grow mid single digits again as a sector and institutional specific division will have mid single-digit growth this year as well.

Understood. Thanks.

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Hi. Can you give a feel for on – particularly on the more on industrial facing parts of institutional, so the dairy and food and beverage and so on. What kind of dispersion that you’re seeing in terms of acceptance or traction with the price increases? Are there any pockets regional or otherwise on pricing gaining traction where it’s being more difficult? Secondly, as you think about the digitalization investments, what would you need to see to – over the next couple of years to significantly change the pace of investment?

Yes. Well, the first question around industrial and where we’re seeing pricing, I mean, we saw a significant improvement in pricing capture throughout the year and ended over 3% in our industrial businesses in the fourth quarter. We expect that to continue as we enter 2019, as I discussed earlier. You’re right, regionally, it’s not exactly the same number everywhere. I would say, China, which was a net plus in the pricing column, is always a more challenged market, it’s cultural, it’s historical, et cetera. But we are pushing and securing price there, just not at the same rate that we’re seeing in some of the other markets, but we also know that ultimately that’s got to change too. So we feel good about the ability to capture price. I think at the heart of it is that the value we bring to customers is tangible. They understand it. They’re willing to pay for it, because they know that net we are a better deal than their alternatives, and we work very hard to merchandise and prove that day in, day out, and it really comes from the significant water and CO2 savings or energy savings that we help drive within their facility, which often are greater than the total bill they pay us. So that’s an important part of the equation, important reason we get price. And the second question, digital. I would say, what do we need to see? Well, I mean to me, this is one of the most critical things that we need to do. We have huge built-in advantages that we need to leverage. And I think those advantages play really well in a digital future. We have nearly 3 million customer sites, probably 90% we’re collecting information today. But a very small fraction of…

Thank you.

Thank you. Our next question comes from the line of Tim Mulrooney with William Blair & Company. Please proceed with your question.

Yes, good morning. I have two questions. The first one, how much – going back to the price raws conversation, how much were delivered product costs year-over-year in 2018? And what are your assumptions for 2019?

Well, they’re up high single-digit, like 8% globally raw materials rate, et cetera, pretty significant. Our assumptions into this year are roughly half. So..

Got it. That’s helpful.

…so increase, but more at the 4% level.

Yes. Okay, perfect. That’s what I’m looking for. And then, Doug, relative to my model, the business that outperformed the most in the back-half of 2018 was water. Were there any large orders or other one-time events that drove such strong performance? And how are you thinking about water for 2019, particularly given the difficult comps in the back-half of the year? Thank you.

Well, if the water team is listening, I’m hoping for 20% in 2019. For the investors, I’d probably calm that down a bit. No, I would say, the water business is an annuity business, like the balance of our other businesses. So it’s not a – I mean, there can be occasions, where we have a significant investment and/ or sale, But that’s quite rare and was not the driver for the acceleration in the second-half of the year was fundamentally improved pricing certainly helped. But I would also say, big, big success in terms of driving new business – net new business, and that’s always the key to driving our top line. And the team in heavy, in light, in mining, really kind of broad. It was a broad success story. Paper obviously saw the numbers there, have done a very good job…

Yes.

Leveraging innovation to drive new sales as they go forward.

Got it. Thank you.

You bet.

Thank you. Our next question comes from the line of John Roberts with UBS. Please proceed with your question.

Thank you. Back on the digitization efforts, as they proceed, would you expect the institutional business to go – be able to go down into smaller customers? More effectively, you’re concentrated up in the larger chains, but I don’t know whether this allows your guys to – at a lower cost to be able to provide some sort of services to the smaller restaurant chains that have been harder for you to penetrate?

Yes, I would imagine ultimately as we continue to drive utilization of the technology and the technology continues to evolve and typically, the evolution of digital as a lower cost, not higher cost. Yes, I think you would ultimately – our focus is going to be driving superior outcomes for our customers. But I would also say, I imagine that using digital will enable us to be even more targeted and how we use our very advantageous field resources more successfully and more efficiently. And as you’re able to do that, you’ve got the best of both worlds, which is you will learn more, you can be predictive, but you can still react and have the capability of solving the problems that you want cover, which is a huge desire on our customer standpoint. So, yes, I think, it will lower cost, improve our capabilities and enable us to probably go to a broader swath of the market.

And then could you give us an update on the institutional water market? You had a relatively small business and now go ahead a relatively small business. And I have kind of lost track as you’ve tried to increase your penetration there, it’s not broken out clearly?

Yes, there would be our – the water light business would include the institutional market and food and beverage markets, et cetera. And that business has been a very consistent, if you will, mid to upper single-digit performer for quite a while. And we really, if you will, reprioritize that business. It was an important business for Nalco in the 90s. It got deprioritized in the 2000s, and we thought incorrectly so did much of their management by the way. And we have, if you will, resplit and one of the early work we did was going to redividing the Nalco water business into dedicated focused business units, much how Ecolab thinks about going to market. And I would also say much how Nalco used to go-to-market in up through the 90s. And this is proven to be a good investment and a – and good work to go through, because one of the reasons I believe we are seeing improved water results is that, we’ve gone through all of that work and now have this redivision, if you will, done largely globally and focus drives results. And in the light business, we see it as well. And so we are out there working to secure. We’ve made some acquisitions to give us route capabilities and in New York market, in particular, we want to learn from that route model and see if we can’t replicate it another large metro areas, because we think it gives us an additional means of getting after a large segment of that market.

Thank you.

Thank you. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Thank you. Could you just give us some comments on the gross profit margins for the year in terms of how much improvement you think you’re going to get and you talked about overall cost for the year earlier? But how does that phase in through the year, and where do we see the inflection and GPMs? In which quarter?

Yes. I think, here we would expect to start seeing daylight, if you will, or year-on-year improvement in gross margins, second quarter for the vast majority of the businesses. And I think, you’ll see improvement in the first quarter versus the fourth quarter in terms of margin, if you will, gross profit year -on -year decline, it will be much less. So you’re going to see the line, I think, steadily improved from second-half through the first quarter and second quarter, I’d be surprised if we didn’t have, if you will, increased margin year-on-year 2019 versus 2018 in Q2. For the year, given that we’re going to have this, I mean, it’s going to be – I don’t know 30 to 50 basis points kind of improvement this year overall. But obviously, it’s going to be stronger in the second-half than it is in the first-half as we just discussed the first quarter situation.

Okay. And just as a housekeeping follow-up. Any comments on cash flow generation and working capital? And you also noted a lower tax rate, I assume, it’s not materially lower?

That’s a Dan question.

Yes. So let me just say, we feel great about our cash flow in 2018. I mean finished – that was a question mid-last year. We outperformed my expectation at that time and look for 2019 to continue to be a great free cash flow generation you’re looking for sort of the yield of reported net income to free cash flow in the 90%-plus range okay? And yes, the tax rate, so clearly, we benefited in 2018 really from the U.S. corporate tax reform. Also let me just say, from a lot of good tax work that we did consistent with the new rule in terms of continuing to improve our position, but not expecting great shakes in 2019 in comparison expect the rate to be flat or maybe even tipping up a couple of tenths of a percentage point, okay.

Thank you very much.

Thank you. Our next question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.

Great. Thank you. Your enterprise selling has been doing pretty well, especially in F&B and Pest Elimination. Can you just give us a quick update on these teams, given the current degree of customer penetration and just how we should think about this in 2019 and 2020? Is it still safe to say we’re in the early innings? Thank you.

Based on share, you’d have to say, we’re in early innings. And so while we’ve been in these businesses, we’re successful. In some key markets, we’re number one, but we still have significant upside from a share standpoint and we think just like a line of sight in front of us. So, we would expect the pest business to continue to perform as it has been, which is kind of high single-digit organic growth rates. They’ve been executing very well. We continue to invest in that business as we believe we need to sustain that type of growth rate. F&B had a good 2018, ended up with 6% growth in the fourth quarter, kind of organic growth rate. They too are working hard to secure pricing, too, if you will, recoup the margin that was lost as a consequence of the significant raw material run up. But in terms of top line, there are significant opportunities. I would say, the combination of water and F&B’s food safety programs is an outstanding story that our customers have really responded to. We had early success when we first, if you will, acquired Nalco and we talked about $0.5 billion in terms of sales synergy, which we also announced that we more than surpassed. I would say, the momentum is built if anything. And it’s really the team’s willingness and drive to continue to refine the story and now have that translate into new innovation, where there are synergistic innovations between water and F&B, shared platforms around 3D, et cetera, all those things, I think, bodes very well and is a reason we’ve seen a huge uptick in, I would just say, share in that space.

Just a quick follow-up on healthcare. Last year, I believe or at least over the last couple of quarters, you’ve been shifting your sales approach a little versus your competitors. Can you just comment on the status of the strategy evolution? Any key differentiating offers – offerings? How you handle yourself in the hospital versus your peers? And then just overall approach to reaccelerating the growth in this business? Thank you.

Yes. No, I – fair. I mean, we talked about healthcare last year and we had a, what I’ll call, like disappointing start to the year, where first-half was very low single digits. We forecasted that we would improve throughout the year into the team’s credit they did. So we exited in the fourth quarter with a 4% organic growth rate in healthcare. It’s really driven. I’d say, there’s a couple of things. The team has done a lot of very good work in terms of developing programs. And we believe they’re the right programs the team does, I do. They’ve done great work around utilizing digital technology to, I would say, further enhance those programs and it’s quite compelling stuff. What we need to do is probably sharpen the way we talked about benefits, which I mentioned in previous calls, which is certainly reduction in healthcare acquired infections and significant rate reductions. But we also need to do a better job translating that into economic benefit, and I think the team has done a lot of work there. Our program business in healthcare, if you will, the stuff that we’ve been emphasizing and putting, if you will, our real sales effort behind is growing double-digit. It’s just not the majority of the business yet. But if you continue this path over any length of time, ultimately, it becomes the dominant piece of the business in terms of size and therefore, more of that growth start showing up in the overall number.

Thank you.

Thank you. Our next question comes from the line of Dmitry Silversteyn with Buckingham Research Group. Please proceed with your question.

Hello?

Dmitry, your line is live.

Hi, thanks. I just wanted to follow-up a couple of questions. Number one, can you talk a little bit about what’s going on given sort of the softer economic conditions in parts of the world outside of the U.S. with your restaurant and quick service business? I mean, how should we think about your ability to gain share in this – in a slower growth environment in 2019 in that space?

Yes. I would say, we don’t think – I mean, I think, what we’re going to see the economy have any impact is probably Europe. And the U.S. is forecasted to grow slower, but we’re not that GDP sensitive. We still think it’s going to be a very solid economy, and our ability to go capture share and do things and offset lost businesses, et cetera, we think remains pretty robust in the U.S. Europe isn’t going to be a tougher environment and we think probably where you see weaker economies maybe show up. Globally, as I mentioned before, we think institutional will continue to have a good year in 2019, but Europe will probably be their soft spot.

Okay, all right. And then just as a follow-up on the – your comment about Europe being sort of the most competitive and kind of the most difficult market for you to execute the sort of the value-added strategy that you’ve been called known for. This – you probably could have made this comment 20 years ago. And so my question is, is there anything on the horizon in Europe either from what you guys are doing or what other players are doing in terms of consolidating in that space and that geography? And if not, what’s stopping the consolidation of the industry that can result in better operating environment for the remaining players?

Well, I wouldn’t say, we go out to consolidate an industry. It’s going to – our view is typically, if we’re going to do M&A, it’s – because it gives us the ability to enhance our offering to customers either through technology and/or gives us access to our markets and maybe here too for we didn’t have access to. Dmitry, I guess, if you want to take the long view, which I appreciate, certainly, our competitive position in every business, most notably, institutional is dramatically better today than it was 20 years ago, 15 years ago, 10 years ago or five years ago. We have a larger share. We’ve outgrown our competitor in terms of absolute percent on double the size, I think, every year probably or close to it. I don’t have all the facts, because they’ve been private much of the time. But I think we have pretty good estimates, because they were public for a period of time and that includes Europe. And our Europe business improved to just it is a tougher situation. So these are kind of relative comments. I don’t feel we’re impaired in Europe, or there we’re missing any technology or critical competitive advantage to compete, it’s just relative to the other markets. Our competitive situation undoubtedly is more challenging in Europe than it is in other places. But I don’t believe it’s an obstacle.

And you don’t see that changing, I guess, in the next, let’s call it, three to five years?

From now, I don’t know. I mean, it’s hard to predict. I – so I think we’ll continue to get stronger over the next three to fie years, I think as we start leveraging more effectively. I mean, one of the advantages we have is size. We invest a lot more in R&D just in absolute dollars and dollars count in R&D. And we ought to continue to leverage that scale to our advantage, which I think is one of the strategies that we’ve effectively utilized over the years. And as we do this in digital is a perfect example of that developing world-class platforms and leveraging them broadly is something that we can uniquely do. We can afford to put more money into them, because we have more money. And we’ll continue to do that going forward, I do believe that will translate into advantage over the next three to five years.

Okay. Thank you, Doug.

Thank you. Our next question comes from the line of P.J. Juvekar with Citigroup. Please proceed with your questions.

Hi, this is Scott on for P.J. Thanks for taking my question. Doug, if I go back to the institutional business, I think, you had forecasted for 2018 top line growth to return to the mid single-digit range. And it did despite weaker restaurant foot traffic in the U.S. And I think, would you mind talking about some of the drivers behind that growth this year? And do you think that level of growth sustainable through 2019?

Yes. I mean, we forecast mid single digits for 2019. I don’t know if it means that the points flow exactly at 5 or point faster. It’s relatively the same – roughly the same type of growth rate this year. And the reason we won’t see acceleration is a little bit of that conversation on softness in Europe. And as we overcome some of the losses through new business, which we’ve secured, but you’ve got to go install it. So I’m quite confident in our institutional business as we go forward. What drove it last year is sort of old-fashioned. We sold new business. They had a lot of very successful innovation uptake throughout both their warewash platform, as well as continued progress in their laundry platforms. Those are by far the most important factors in driving this growth and they’re starting to see it more broad. So China is moving quite nicely for our institutional business. It’s going to be the most important market long-term for food service globally. So that’s a very important investment area for us and an important place to see traction long-term.

Okay. Thank you. That’s all I got. Thanks for the color.

Thank you. Our next question comes from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.

Hi. Thank you for taking my questions. Hey, Doug, are the assets that you’re expecting to spin out in the energy space expected to grow this year in line with corporate average above or below corporate average?

More in line. So, we would say, it’s mid single-digit top line growth. We would expect to see margin expansion as well in the upstream business as they recoup and the significant raw material inflation that they’ve seen as well. So I wouldn’t say, the business is going to work dramatically different with or without it, if you will, from percentage growth and percentage OI growth.

Okay. And then just – would you just from an on the ground perspective, after you spinout this business, is there – does that give you more management wherewithal to focus on other areas of the company, or is there some commentary you could talk about in terms of the kind of executive management focus that was required for that business over the last several years? I guess, what I’m getting at is beyond just kind of changes in the end markets, does this free up some management time or bandwidth to focus on the other businesses that you just didn’t have beforehand?

Yes, I guess, I’d answer it this way. The basis for the spin remains, the model is shifting and it’s increasingly becoming less like our other businesses in terms of the disciplines and expertise you need to run it, which we talked about during the spin call. And that’s really the reason that we’re doing it. I would say, an additional benefit is exactly what you said. I would certainly, if you will, kind of the models we’re running are more alike, so you get more synergy in terms of management investment and time. You get more synergy in terms of uptake on specific developments. You probably will have in digital and/or some of the other technology as we go forward. So, yes, I think a side benefit is the company becomes arguably a little easier to run, which means more bandwidth to go drive innovation and improvement in what you’re running.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Hamzah Mazari with Macquarie Group. Please proceed with your question.

Good afternoon. Thank you. My question is just if you could remind us on synergies between various businesses in the portfolio? The reason I ask is, you touched on water being a significant portion of downstream. Maybe just touch on how many of your corporate customers subscribe to your entire suite of products, or however you want to answer that question, I appreciate it?

Yes. I – well, it’s a hard one to answer, simply because of the breadth we have, as I mentioned 3 million customer units around the world. We don’t track by, I would say, the best way to answer, I think, the heart of the question is this, there’s not a customer that we sell that we couldn’t double or minimum triple the business with if they ended up buying all of our offerings. And that includes our most longstanding, most highly penetrated customers. And so we have significant upside in every customer. Now a lot of this is planned upside. We continue to invest in new technologies. Water continues to build out, if you will, their capabilities around cooling tower and Legionella detection and ultimately prevention practices. When they do that, they become – they open up the scope of offerings or customers that they can go sell to. And as a result, the opportunity continues to increase. We’ve always said, we want to grow every year and we want to grow our opportunity every year. So we don’t end up running into walls like our share is too large and there’s no more growth in front of us, which is a mistake too frequently made by too many companies. So we’ll make a different mistake, we’re not going to make that one. So I don’t care if it’s passed. There’s huge penetration opportunities, water huge penetration opportunity, institutional itself has significant penetration opportunities. They’re getting after water filtration in a more concentrated way and a number of other technologies and there’s huge upside for them in a number of their customers. Warewash and our KAY QSR business has got significant upside potential. So there’s probably not one set of customers or one set of technologies that doesn’t have upside from circle to customer opportunities.

Great. And just a follow-up, does the spin of energy increase your appetite to do larger deals? I know you haven’t done one in a while, maybe it’s valuation or maybe something else, but just any thoughts there? Thank you.

Yes, I think, our appetite was plenty large to begin with. I think, it’s always going to be counterbalanced with discipline. And so, yes, I think the company and the team has proven that we can successfully do whatever large deals mean deals in the billions. We would not be afraid to do that, but we aren’t going to do it if we don’t think the valuation is such that will enable us to have healthy returns for our shareholders. Ultimately, that’s why shareholders invest in us. You can do a lot of deals, make them accretive on EPS, but they’re lousy return deals and long-term, we think it’s return that drives value.

Thank you.

Thank you. Our next question comes from line of Scott Schneeberger with Oppenheimer & Co. Please proceed with your question.

Yes, thanks. Hey, Doug, on – following Hamzah’s question on M&A. The last real big win was about two years ago was Anios. Could you give us a progress report on that one? And then this conversation earlier about how Europe maybe the soft area? Going forward on a relative basis, what’s your propensity to do M&A in that region specifically, might there be an opportunity upcoming? And then I have a follow-up. Thanks.

Yes. So Anios has been very successful. And through today versus its plan is on or above plan on almost all of key metrics. And so we feel very good about how the team integrated, how Anios onboarded the cultural overlap. I mean, there aren’t many areas, where we don’t feel good about how healthcare is integrated that business. So I think, it’s – you would chalk it up on the success side. We typically have fairly aggressive management cases for deals. They are higher than our investment case, if you will. And so Anios is off to a good start. In terms of Europe, as – yes, I would sort of concur that. Soft economic environments typically or can create good M&A opportunities. And if you even recall when we bought Nalco, 2011 was very early, if you will, and M&A heating back up. And for some, was a little earlier than they thought maybe was wise, at least, the first eight weeks. And so – but the consequence we bought that – the print number was like 11 EBITDA, and with synergies, it was high single digits. And it was, because it was following a big economic change. So, yes, we’ll be aggressive in looking. Our relative performance tends to do quite well in tough economic times, and we’re a good cash generator. So our capabilities of doing M&A don’t change demonstrably in tough economic times and our advantage probably changes more significantly up in bad economic times.

All right, thanks. I appreciate that. And then the other question was in the Other segment, very, very strong operating margin expansion there. I imagine a lot was because of the departure of Equipment Care. But that you’d all anniversary now heading into 2019. so I’m just curious what – what’s a reasonable steady state the margin to expect there? And what’s – what is achievable? Thanks.

Yes. Well, you’re right. A big piece of that year-on-year margin growth is the fact that GCS was still partially in the base and had obviously a very low margin relative to the other businesses. So exiting that impacted it, right? It’s out. So going forward, yes, I think you’ll see steady improvement overall in that base. I mean, there will be some lumpiness simply because CTG can be a little – it’s a small business, but relatively lumpy. It can have some big quarters plus and some quarters not as large, if you will. Pest over time has been a very steady performer. It’s one of the higher-margin businesses that we have. It’s a good margin business, very commensurate with other pest businesses, if you will.

Thanks very much.

Thank you. Our next question comes from the line of Rosemarie Morbelli with G. Research. Please proceed with your question.

Thank you, and good afternoon, everyone. Doug, I was wondering if you could talk a little bit about Bioquell and how you are planning to integrate it with your – in your healthcare business? It sounds to me as though it is totally different from what you are offering. Can you give us a better feel for what you’re doing with it?

Yes, happily. So Bioquell is a different business. It’s really, if you will, being integrated, let me define that word for a minute in this case into our life sciences business. So there will be some application of the Bioquell technology in healthcare or acute care specifically, which isn’t unusual for us. But predominantly, we view the Bioquell being targeted against the life sciences, i.e., pharma, cosmetic industries, et cetera. The life science approach here and, if you will, the acquisition model is fairly light touch initially from an integration standpoint, often our mantra. I mean, we stole it from somebody else, is make sure do no harm. We’ve got a great business with great technology, great competency in the team that we brought on. We want to understand how we most effectively leverage, if you will, the other parts of life sciences to advantage Bioquell and vice versa. That takes time. We have a thesis going in, but you need some experience to prove and learn how do you best do that. Long-term the Bioquell capabilities are always going to be somewhat unique, and so we’re always going to need, if you will, a unique center with people who are expert in specialist in that area. So we’re probably going to take more of an approach like we did with Anios, or we did with even KAY many years ago, which is utilize the asset, learn and understand the team, feed them with technology that can enhance them and learn from them how do you best, if you will, drive that business performance over time.

So I thought it was – I thought that their technology allows them to totally isolate a room if there is some kind of infection that you don’t want to spread anywhere else. So how does that apply to life science and the cosmetic industry? I thought, I mean, I thought of it as acute care and hospital, not at all in life science or cosmetics?

Yes. There’s times in pharma and/or cosmetics or other manufacturing where you need to do a, if you will, kind of concentrated shutdown and comprehensive kill. And so that’s not infrequent. It’s an important part of the tool. It could be just parts of a manufacturing facility. It doesn’t necessarily have to be the whole thing. It could be a specific clean room applications and others.

Oh, that is very helpful, thank you. And then, lastly, if I may, when I look at your operations, you have reached 46% to 48% gross margin. I’m assuming that the Energy Upstream has lowered it in addition to the inflation and so on. But is there a chance that you can return to that particular range? And how quickly could you do that?

Yes. Well, you’ve got a couple of factors, I mean, you’re right. Our margins post-spin will be greater than they are pre-spin. The other factor though, if you’ll recall, is the rev rec changes that we undertook, where we had, if you will, moved on the P&L geography, some of the service costs, which previously were in SG&A. It was like a 5 point – or 500 basis point change in overall gross profit, had no impact on OI, if you will. But it did have an impact on gross profit or gross margin. With that said, certainly, I would say, you can expect, I mean, it’s not hard to figure out that both our OI margin post-spin as a consequence also our ROIC post-spin will both be enhanced fairly significantly by the change.

Okay. Thank you.

Thank you. Our next question comes from the line of Justin Hauke with Robert W. Baird. Please proceed with your question.

Great. Well, that last one actually was kind of what I was going to be asking about which was kind of structural gross margin expectation that would be aspirational from here. And I guess the second part of that question would be does pricing need to be even greater than it is or is there something else that’s diluting the gross margin down, because 3% pricing is about as good as it’s been really, I mean, in decade-plus. And it seems like with raw material costs only up 4% in the outlook, all else equal, I would think that there’d be a little bit more gross margin recovery than kind of flat to up slightly that – that’s implied here. So is there anything else that’s changed that’s maybe diluting the gross margins down from where we would otherwise expect them to go to?

No, there haven’t been fundamental changes. I would just say, as I mentioned earlier, last year we had 8% raw material increase. And we built a pricing through the year. Pricing in total for 2018 was 2%. It was 3% in the fourth quarter. And so we are moving in this year with a lot more momentum, obviously, than we moved into 2018. And raw materials, while they’re expected to increase, it is at a slower rate. But the most severe year-on-year comparison we’re going to have on raw materials is in Q1, simply because they started moving really kind of Q2 on forward, if you will. And so the base becomes somewhat easier as you go throughout the year than it starts. With that said, we said we don’t have really any hockey stick forecast for EPS or other things. We believe we’ll be able to manage through this as we go on throughout the year, but there are no other huge structural issues. The last point I’ll make is recall, we are – we’ve now had 100% of our U.S. supply chain. The bulk of the supply chain moved on to SAP. And we did that all the way through 2018 and actually put the last 15% on last week successfully. And it started a year ago like mid-February, and we now have a 100% of that supply chain. That costs money. It costs money certainly in just the investment in SAP systems, you turn it on. But probably most importantly, it creates, if you will, hijinks in your supply system as you need to move inventory around internally, as plant productivity goes down near-term, as you move them from one system to another.We said when we were going to undertake this that this would not make a quarterly call and it hasn’t. The team did a great job managing this successfully, not making this a point of distinction and it was a big, big initiative. It certainly has cost there. We will have some continuation of higher costs this year than I would call normal in our supply chain as a consequence of that. But that will bleed off as you move and exit 2019 as well and we move into 2020.

Okay, great. And then the last one, this is just purely a number question. But of the $325 million just so we can track and calibrate better on the cost savings that are expected. What’s expected in the 2019 guidance specifically?

Yes, $80 million incremental versus last year.

Great. Thank you.

Thank you. Ladies and gentlemen, this concludes the question-and-answer session. I’ll turn the floor back to Mr. Monahan for any final comments.

Thank you. That wraps up our fourth quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thanks for your time today and participation and best wishes for the rest of the day.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.