藝康 (ECL) 2016 Q1 法說會逐字稿

Greetings and welcome to Ecolab first-quarter 2016 earnings release conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Michael Monahan, Senior Vice President, External Relations. Thank you. You may begin.

Thank you. Hello, everyone, and welcome to Ecolab's first-quarter conference call. With me today are 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 their 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 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 in the section of our most recent Form 10-K, under Item 1A Risk Factors 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 quarter, continued attractive new account gains and new product introductions drove good fixed currency sales growth in our Global Institutional, Industrial, and Other segments during the first quarter, nearly offsetting a decline in Global Energy sales. New business and ongoing cost efficiency work led the strong adjusted fixed currency operating margin expansion, more than offsetting the impact of soft economies, weak oil prices, and currency headwinds.

These, along with fewer shares outstanding, drove the adjusted earnings per share increase before currency translation. While 2016 is proving to be a challenging year, we continue to focus on the same fundamental strategies that have successfully driven our strong growth record: providing the best products and service for our customers to give them the best results and lowest operating costs. They delivered again in the first quarter and we expect them to deliver for the full year 2016.

Looking to the second quarter, we expect our Global Institutional, Industrial, and Other segments to continue to show solid acquisition-adjusted fixed currency growth, outpacing their markets and soft international economies, as they leverage investments we have made to further improve sales and service force effectiveness and profitability, and more than offset lower results from our Global Energy business.

We look for second-quarter earnings per share to be in the $1.03 to $1.11 per share, with that range including approximate $0.08 per share, or 7%, of unfavorable currency translation and impact from the Venezuela deconsolidation, as we continue to aggressively drive business growth. For the full year, the Global Institutional, Industrial, and Other segments are expected to continue to show solid fixed currency growth.

Global Energy segment expectations have softened. Global Energy sales are expected to be on the lower end of our range, down upper single-digits versus last year. While the dollar has weakened somewhat, at this early point in the year, we are maintaining our earnings per share forecast for 2016 to reflect the uncertain currency trends and business environment.

Net, we continue to expect to outperform our markets in 2016, while also investing in the key drivers for future stable above-average earnings growth. We expect our consolidated results to show improving comparisons in the second half and continue to look for adjusted diluted earnings per share in the $4.35 to $4.55 range.

Moving to some highlights from the first quarter, and as discussed in our press release, reported first-quarter earnings per share were $0.77. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, first-quarter 2016 adjusted earnings per share decreased 4% to $0.77, reflecting an $0.11, or 14% currency headwind. The adjusted earnings per share growth was driven by delivered product and other cost savings, cost efficiencies, and the lower share count.

Our consolidated fixed currency acquisition-adjusted sales were modestly lower as our Global Institutional, Industrial, and Other segments grew 4%, but were offset by lower Global Energy sales. Regional sales growth was led by Latin America and Europe. Adjusted fixed currency operating margins showed strong growth, expanding 60 basis points.

In 2016's difficult environment, we are focused on driving new business gains by helping customers to lower their costs. We are using our industry-leading product innovation and service strengths to help customers achieve the best results and lowest operating costs, and through these, aggressively drive new account gains across all of our segments. We expect second-quarter adjusted earnings per share in the $1.03 to $1.11 range, reflecting a currency translation and Venezuela deconsolidation drag of approximately $0.08, or 7%.

Consolidated results are expected to improve, with the second half outperforming the first half. We look for full-year adjusted diluted earnings per share in the $4.35 to $4.55 per share range. In summary, despite a very challenging global economic and market environment, we expect to continue to deliver solid fundamental results in 2016. We remain confident in our business, our markets, and our people, as well as our capacities to meet our aggressive growth objectives over the coming years. And now here's Doug Baker with some comments.

Thank you, Mike. Good afternoon, everybody. We had a solid quarter. We're on track for full-year delivery within our forecasted range. All of our sectors are handily outperforming their markets and competition, and we continue to gain share in all of these areas. For the year, there are natural puts and takes. We look at our Institutional, Industrial and Other business segments.

They have been above expectations at this point, driven by new business, innovation, cost savings, very good execution. This is driving improving top line and improved margin performance. Energy is heading to the lower side of our expectations, in despite of share gains and savings initiatives, and this is really driven by an even tougher market than expected. This will pass. We continue to believe, though, that the upturn is really a 2017, not a 2016 story, i.e., the oil and gas market upturn.

If we froze FX at today's rates, FX would be less of a negative than planned. It would be roughly $0.28 versus $0.38 negative, but given the fluidity of the FX situation, Brazil political environment, you got the British exit vote, China, et cetera, we think it's too early and unwise to bake this into our forecast. Importantly, our forecast also continues to include significant investments in systems, R&D, talent initiatives, which are all in total greater than last year, which I would remind you was greater than the prior year, and is a very strong indication of our confidence in the future, which is high, and we believe for good reason.

So as we look at the future, we know that the temporary double headwinds of energy and FX will abate. Don't know exactly when, but they will pass. Even with them, we've been doing well and outperforming markets. We do know, though, that our plan and our position, we think are spot-on for the future. So clean water, safe food, abundant energy, and healthy environment is even more relevant going forward than it has been in the past five or 10 years.

We have a stronger competitive advantage position now, we believe, given our recent new innovations and our focus on driving excellent outcomes at low costs because of reduction in footprints on CO2 and water. We also have very strong execution momentum. Our teams are on it. They are doing a great job. They are driving new business. We had another very strong new business quarter in the first quarter.

And we have promising new business bets in businesses like life sciences and geographies like MEA and there are plenty more. And finally, we've got a culture and a team that knows how to deliver. For all of these reasons, we feel very good about where we are, how we're going to get through the year, the position we're going to be in to drive continued growth beyond. So that's my opening. And with that, I'll turn it over to Mike, who will move on into Q&A.

Thanks, Doug. That concludes our formal remarks. Operator, would you please begin the question-and-answer period.

(Operator Instructions)

Our first question is from Gary Bisbee with RBC Capital Markets. Please proceed with your question.

The first question. Oil has rebounded a lot off the lows. It doesn't sound like, from you or others, that, that's going to be enough to really impact the trend in the energy business, but how should we think about raw materials? It seems like that's probably somewhat more of a headwind by the second half of the year, assuming prices hold. Is it fair to say that the energy business isn't seeing any real benefit yet from the [move] at the bottom. Thanks.

Yes, the recent move in oil price, the best predictions I read forecasted that oil would move up in anticipation of increased demand for the summer. It was likely going to weaken over the summer because really what needs to drive the fundamental price of oil is a rebalancing of supply and demand and nobody really believed that was going to happen until towards the end of this year.

Until that happens, you're not going to really, we believe, have sustained improvement in oil price or increase -- maybe we shouldn't call it improvement -- increase in oil price. In terms of raw materials, our forecast has always had two views: one, that raws likely move before we see the impacts of higher oil prices on our Energy Services business. That's in our forecast, so in the back half, we have some uptick in raws included.

Not monstrous, because we still have favorability in the first half, but that abates and goes away, as we think the energy markets start correcting and healing. So that's our view right now. I don't think you're going to see material increase in activity, which is what's really needed to drive our Energy Services volume until, at the earliest, very late this year, but most likely, we aren't going to see the impacts until 2017.

Okay, great. And then the follow-up, have you -- you cited that energy is maybe a little bit weaker, but have you seen anything else change much in the last quarter? I'm just thinking through the thought process of not flowing through the FX. I understand there's a lot of uncertainty, but a lot of data has pointed to weaker global growth. Are you seeing that impact on the businesses or are you staying conservative at this point? Thank you.

If you look in our total business mix, we call out mining is under a lot of pressure, which isn't a real surprise, given everything else you read. This is really the water technologies that we sell into the world's mining operations. That business is down double-digit. So you'll see spotty things, China, particularly on the heavy industrial side is soft, so I don't -- our business reflects what you're going to read day to day about the global economy, but overall, the model, as it has always proven, is fairly resilient.

We have puts and takes. We also have pretty strong business performance from Institutional and North America, in particular. There are oil dividends, which we've talked about, which are certainly lower raw materials, which you see flowing through our II and O segments, which is one of the reasons gross profit is up. The other reason, obviously, is innovation.

So I don't think the other surprises are really outliers, nor will they dictate the year. And even the energy market softness, I would say it's the -- it's worse than we anticipated. I would still think energy is likely going to come in with the range we talked about. It's just going to be at the bottom end of it.

Great. Thank you.

Our next question is from Nate Brochmann with William Blair. Please proceed with your question.

Hello, everyone. Doug, just following up on that, with the energy question, do you feel that at this point, while we might have the lingering behavioral impacts, and obviously still some pricing pressure as you help out your customers, but do you feel like at this point that you -- that we're in the later innings of getting your arms around -- that we're getting close to a true bottom in that?

Yes, we're certainly in the later innings. I'm not unwise enough to pretend to know if the bottom is 30 days ago or 90 days in front of us, or six months in front of us, but certainly we're in the later innings. The data I pay most attention to is where are we on the supply/demand curve? There's virtually no inventory storage capabilities globally for oil, so this thing reacts wildly to very small changes in supply and demand.

That is still projected to start coming in very near balance at the end of the year. And I believe ultimately that's going to be the data that dictates when this thing completely turns. So we're -- what are we? 18 months into this? And we're saying probably you have six to nine months to go, so certainly we're in the later innings.

Okay. Great. Then with the other businesses, too, particularly on the Institutional side, on a relative basis, I definitely get the relative strength compared to the industry trends, but with the end markets still being a little bit sluggish, I was wondering what it's going to take to get that Institutional business more in that sustained 6%-plus growth range that I know that we're hopeful for. Do we need the end markets to do that or are there certain initiatives in place that can do that by themselves, even in a sluggish end market environment? Thanks.

I would say in Institutional, Nate -- the Institutional business itself or even the sector, institutional business was north of 6% last year. It was 5% in this quarter, but expected to be 6%-plus for the year. That was really a quarter phenomena. That business is operating in the 6% to 8% band that we've talked about.

The team has done a good job and the team will tell you and I'll tell you, they still have a lot of opportunity to get after growth opportunities and margin opportunities, particularly outside of North America, which they are focusing on. So that business is running as well as it's run in terms of its financial performance for many, many years.

Our next question is from Laurence Alexander with Jefferies. Please proceed with your question.

Good afternoon. Two quick ones. Can you flesh out a little bit the comments about Latin America? And, secondly, can you give us an update on how you're thinking about the M&A pipeline, particularly any chances to increase your footprint in the emerging markets?

The expanded footprint in emerging markets, we've operated now obviously for a while and we talked about 160 before the merger and we're in 170-plus post merger. However, we didn't have equal capabilities in all of these markets, and in particular, we made a break-out investment move in MEA about 18 months ago, and this cost us margin, obviously, last year and even a little bit early this year, but it has driven improved results.

Previously, we really ran MEA as part of Europe. Our history, whenever we make these break-out organizational moves -- we did it with food retail, breaking it out from KQSR. We did it many years ago with healthcare outside of what was then called EPP, which is our janitorial business. There are plenty other examples here. Both participants benefit, improved focus.

You're seeing that MEA has accelerated since we've broken it out. We have increased focus. We have a handle on our supply chain channels and opportunities, and I would also point out Europe has done better since we've taken MEA out as, well. Just simply, it drives increased focus on the region that's left. So that would be a good example of how we are investing in what we think are critical markets long-term.

Latin America, we grew by basically 10%, or 9%, in the quarter. We continue to do well in a region that's obviously under a lot of pressure, Brazil being the most notable headline owner right now. And I would say it's two things. We've always tried to focus on what matters most in these areas. Our food and beverage business, which is important throughout all of those economies, is up 19%.

Even our paper business, through some big wins, is having a very strong quarter. Water is up double-digit, down in that market, as well. And we believe those businesses in particular are going to be very strong players in Latin America for a long time to come. That's what our focus has been and it's paying off.

Thank you.

Our next question is from David Ridley-Lane with Bank of America. Please proceed with your question.

Sure. Within the energy segment, did you see any change in client behavior around pricing? And just to check, would you still expect pricing in the production side of that segment to still see a modest decline in 2016?

We didn't see a change in customer behavior towards pricing, which would be accepting price increases, so no, they are under pressure. This is not unusual. They are certainly putting pressure us on. You've got competitive pressure as well. Pricing still remains in total in the low single-digits and we expect it to be there for the year, but it's real pressure and a challenge.

What I would say is that's an average. So you've got some much more material give backs in certain situations, and other areas where we've been able to hold price, either because we have very, very unique technology and a high need, or it's a customer not under the same pressure, given their geographic position. So I would expect you'll continue to see that.

The other things that we're seeing in that market, I don't know if they are surprising, is customers are turning off programs and services. We expected some. We're seeing a little more than we expected, but that's always a temporary issue. So people will take some risks, particularly in North America, where the huge market pressure is really coming to bear.

The business outside of North America continues to perform at a much higher rate, simply because the market really reacts here, and everywhere else, people are typically pumping oil to meet bills, not necessarily to meet capital demands and trying to make money. So we would expect to continue to see that. We're remaining fiscally disciplined. Some of the pain is self-induced.

Last year, we had only $4 million in bad debt write-offs in the energy business. We expect it to be greater this year, but still in the single-digit millions, which is pretty low given the size of that business. A lot of it is because the energy team has been very, very acutely aware of the risks there. We're putting customers on cash-on-demand quite early. We're staying out of some bankruptcy situations.

Customers where we don't believe there's a future, either before or after bankruptcy, we are walking from, if they won't go to cash-on-delivery, et cetera. So those are the types of steps that we're taking and they accentuate some short-term pain, but ultimately, even with within the year, we think are going to be fiscally responsible moves because we're going to avoid some big write-offs and other challenges.

Sure. Thank you for the, for all of that color. Just a quick add-on to that. Since you spoke about the trends outside the US being positive, what was the net new business contribution or the share gain contribution that you saw in energy in the first quarter? Thank you.

Net, $50 million, $55 million roughly.

Thank you very much.

Our next question is from John Quealy with Canaccord Genuity. Please proceed with your question.

Hi. Good afternoon. First question, in energy, can we hold EBIT margins here in the back half of the year, or can you, big picture, just quantify that for us? Is this a good rate for the foreseeable future?

The first quarter, seasonally, is always the low margin. For the year, the margin's going to be greater than what energy showed in the first quarter.

Okay. And the bigger picture issues, we're in a better oil environment, so we don't really need to revise longer-term assumptions downward, is my broader question there?

No, I -- we're going through a world-class correction in the oil market. If you compare it to the last four corrections, which typically were more of a 12 to 18 months and this is certainly going to be -- exceed 24 months in our forecast, this is a more severe correction. But no, coming out of this, we -- the demand for oil has not really been the question. What's happened is we've been in an oversupply situation, which has crushed price and now will crush activity, which will lead to undersupply.

That's what we believe is going to happen. You're going to see prices move up, activity increase, and the demand for our services increase, as well. Right now, everybody's focusing on the easiest oil they can find. To meet future demand, they are going to have to start reverting and getting back after the harder oil, which is what ultimately drives higher demand in our portfolio. We believe that story is intact.

Okay. Thank you. Very quickly, as a follow-up, under the healthcare business, holding its own, is this going to be a type of year where we're just looking for sideways healthcare or are we going to hit an inflection point at some point on the acquired divestiture-adjusted change? Thank you, guys.

Healthcare is going to strengthen throughout the year. They had a very, very good new business quarter in the first quarter, second best that they have in measure. So we feel good about what's going on. They are now -- the recall -- it really started last year in the third quarter. It is fully behind them. And while that wasn't a huge top-line hit, it was a huge hit in terms of focus in energy of the group.

And now that's fully done, fully resolved, and moving forward. I expect good things out of healthcare this year. They will continue to improve. It's not going to be a dramatic inflection in one quarter, but you'll see sequential improvement.

Our next question is from Manav Patnaik with Barclays Bank. Please go ahead with your question.

Good afternoon, gentlemen. Just to make sure we're all on the same page on the energy side, can you just remind us of the mix in your energy business again between downstream production and so forth at the beginning of the year? And then what's baked into each of those categories in terms of assumptions to get you to your lower end of upper single-digit declines for this year?

The well chem is about 10%, heading to 8%. The production, or OFC business is about 60% and downstream is 30%. Downstream is growing. Well chem is going to be under pressure again this year. It's likely going to abate towards the second half because you're starting to run in to where they were down 50% in the third and fourth quarter. As you go forward and the OFC business will be under some pressure, but the drama isn't anywhere near what you see in well chem.

Okay.

Last year we were down 8% in total. And we said this year that we would expect to be -- not to have as much top-line pressure, but it may get to 8%. What I've indicated is we're at the lower end of our expectation, so high single-digit sales decline this year, like last year, maybe a little less, but in line with that.

And if you were try and characterize the main differential between when you gave the guidance in late February versus today, which one area moved to get you to that lower end and maybe more?

I would say well chem is going to be a little worse than we thought and OFC is going to be a little worse than we thought. Downstream is going to be in line with what we thought.

Okay. That's helpful. I was hoping you could elaborate a little bit. You mentioned in your comments new business [bets] like life sciences. I was wondering if you could elaborate a little bit more on that and maybe if there's any other new businesses like this that you were referring to?

I'll elaborate on life sciences. Life sciences is a business that we've competed in for a long time, but we did it as part of the work in our F&B business, and some of the function was driven out of our healthcare business. We've taken those two pieces of business and created a focused division on the life sciences market, i.e., pharma, cosmetics, et cetera. The changes in that business and their needs match very much what we can do, so it's a market that's dominated by large multinationals.

They are getting to shorter runs, need to run at higher efficiencies, cleaning in place technology is important in that market and a core competency that we have, so a lot of the things that we do there match well. I would say, when this business is run as a small piece of two other businesses, it performed well. We believe with focused, enhanced capabilities, R&D, et cetera, that we are going to be able to up the performance of this business handily, just as we've done in other markets like food retail, et cetera, in the past.

Our next question comes from Shlomo Rosenbaum with Stifel. Please proceed with your question.

Hi, thank you very much. Hey, Doug, you had a very strong free cash flow quarter in the beginning of the year. Was there anything unusual or any pull-forwards over there?

One, the first quarter, historically, is our low first -- lowest cash flow quarter. Last year was more the anomaly and we talked about it, that working capital, some anomalies in working capital last year really hid the underlying performance. We said you that would expect to see improvements starting second, third, and fourth quarter starting in 2015, and you did, so this year we're going against a last year, what I would call unusual negative cash flow performance.

This year is a little stronger than maybe normal, but it's really driven by excellent working capital. We put real focus on it after last year's frankly unacceptable first quarter. You're just seeing that discipline and focus carry through. Part of it is a conversation I had around energy, where that team in a very difficult environment has done a heck of a job on receivables, in particular, which we needed to, because otherwise you're going to walk right into a problem.

So that's really what's going on. Strong underlying earnings. The business is performing well. It gets masked, principally by FX. Energy is going to go through ups and downs, so I'm not going to walk away from the downs, but last year, get out of FX, we were up 12%, and if you look at our cash flow, you see the underlying strength. That's more indicative of what the business is doing, even with energy.

Great. And just as a follow-up, can you give us an update on Swisher? I know it's not huge, but is the revenue coming in the way that you expected? You were expecting some kind of erosion, and how long do you think it will take to get the margins more in line with the historical Ecolab margins?

Yes, the Swisher acquisition is going as expected, and remember, our expectations are quite high in terms of open [met] return. We did expect to see sales erosion. We are seeing it. It's in line with expectations. Importantly, the most critical and strategic part of their business, we are doing a great job securing. It's not all done. We're continuing to work on that.

In terms of getting after cost structure, the team has made a lot of progress, and if anything, we will end up ahead of plan as we move forward. It hasn't shown up yet, really, in the P&L. That would be probably more in the second half. But in the whole scheme of things, it's not monstrously material, but it will show up in the Institutional results, but really not until the second half. Right now, it's a drag, but it will turn into a positive, but not until the second half probably.

Thank you.

Our next question is from David Begleiter with Deutsche Bank. Please proceed with your question.

Thanks. Hey, Doug, back to Energy, just the cadence of our earnings Q2 through Q4 -- I know we discussed margins, but what's the actual operating profit cadence do you expect for the rest of the year?

Give us a second, David. The -- sorry, I wanted to get -- we had a bunch of percentages. It's probably a little easier to give you absolute direction. We would expect -- second-quarter profit is going to be greater than first quarter. Still under pressure, but not nearly as much pressure as we were in terms of percentage in the first quarter. Almost one-half as much pressure on the percent. We are going to start seeing, we think, profits flatten out in the second half, and the question is, do they flatten in the third?

It's probably more a fourth-quarter scenario that we'll start seeing year-on-year flattening on profits, as you start running against the base, and you start having some sales stabilization and volume stabilization and the new business that we continue to put on starts showing up. So that's the expectation. So I would say, pressure in the first three quarters, for sure. It's just going to be pressure that continues to become less severe as the year goes on, part because of base, part because we've started seeing some new business, but mostly base.

Got it. On the overall gross margin -- nice expansion in Q1. You expect expansion in Q2. Would you expect expansion in the back half of the year, as well, or would that be more flattish, given the direction of raw materials?

We would expect probably not the same level of gross profit expansion in the back half as the first, but we will continue (technical difficulty) improvement throughout the year.

Thank you very much.

Our next question is from Andy Wittmann with Robert W. Baird. Please proceed with your question.

Great. Thanks for taking this. Maybe a little bit of color, Doug, on what's driving the sequential improvement, implicit margin performance. They were down pretty significantly in this quarter. Is that just easier comps or recovering pricing, raw materials, just to understand some of the drivers would be helpful?

First of all, the story is not that different, but the margin commentary I just had on gross profit was full Company, so--

I'm talking energy? Sorry.

That's what I thought. Energy, you've got seasonal volume, where first quarter is our lowest volume month, in whatever environment you want to go on the energy business. So in a flat environment without any share gain, you're going to see a step-up in second and then a minor step-up again in the third and fourth quarter just from seasonality. You have a market which isn't been stable, but we think stabilizes later in the year, not improves, as you go through and so we think that seasonality comes through.

Then the other issue is share, and we continue to gain share, and are net ahead as we go through this. While it's a tough environment, we continue to see the few things that are happening in the world are coming our way and we are getting some of the existing fields to move our way. So it's a combination of those two things that we think leads to a minor improvement when you start looking at year-on-year. You got to remember, last year, the second half, we really had a lot of the market decline in the second half, not all of it, but a lot of it. A lot more than the first half.

Okay. That makes sense. Then in terms of the Other businesses, it looks like healthcare, maybe energy getting less bad, paper, these things all have either sequential improvement or looking for growth in the back half of the year. Are there any markets where you are seeing any other signs of weakness creeping in that we need to be watching out for, that maybe don't have better growth prospects as we move into the year?

The markets besides energy where we're under the most pressure would be mining and heavy industry -- steel, et cetera -- around the world. I would say mining is probably getting down towards the bottom. It was fairly negative in the fourth and much more negative in the first.

We're forecasting flattening and then improvement in mining as we go forward because we start running into the base, but it's not that big of a business. The heavy industry stuff will start running into the base, as well, so I don't think they are -- this is the puts and takes we have all the time so I don't know that it demands increased scrutiny from you. Trust me, it's getting plenty from us.

Thank you.

Our next question is from Dmitry Silversteyn with Longbow Research. Please proceed with your question.

Good afternoon. A lot of them have been answered already, but I just want to follow up on the specialty or the K part of the institutional business. We've seen growth there slow down to mid-single-digit levels. This business used to perform at high single-digit, low double-digit growth. Is it just it's getting to the scale where it's more difficult to grow at the rates you used to grow, or is it the market is a little bit weaker? Can you talk a little bit about what the expectations out of the business should be going forward?

That business is going to continue to perform. It will have its double-digit quarters, but mostly it's going to be growing in the high single-digits. And what really drives is, is I've always described that business feeds a village via elephants, so it's a market that's dominated by large players. When you sell one, you have a big, fairly significant ramp-up, you annualize against it, and you continue to see ramp-ups, so it's a little different cadence than many of our other businesses.

But that business is in great shape and doing the right things. The opportunities in that business are fairly significant because there's real pain in the industry, particularly in North America, as a consequence of wage pressure and ACA requirements. So increasingly customers are going to look to take labor out. Whatever the economists want to say, they are going to take labor out and that's a great opportunity for our QSR business in particular.

Sounds good. Then if you look at -- you mentioned, along with new business wins, some cost efficiencies have helped you with profitability. Is this part of a specific restructuring program that you have? Is it an ongoing control of discretionary expenses in a difficult time? Can you talk about these cost efficiencies and how much of a runway you have left?

As I've described, we have a lot of runway left on continuing to improve our efficiency as an Organization. As I've tried to state before, the word synergy has a half-life, and after a point in time, you don't get to talk about cost savings or synergies anymore. But there's no way you put together two companies the size we did in 150 countries and have all of your synergies worked out in 36 months without taking monster risks and we don't like to take stupid risks.

And so there is a lot still to be mined from the combination of Nalco and Champion as we go forward, as there always is in a company. Even without that, just getting better, new technology drives new opportunities, so yes, we're quite confident. If you look at our track record before we did the Nalco merger, we had routine margin expansion for a number of years and we would expect you're going to see regular margin expansion going forward even if we call it cost savings instead of synergy.

Got it. Okay. Thanks, Doug. That's helpful.

Our next question is from John Roberts with UBS. Please proceed with your question.

Thank you. If I wanted to look at the sequential earnings change in Global Energy, do you have the restated fourth-quarter earnings that would compare? I'm looking at your current earnings. The first quarter 2015, the $104.2 million, that's about $25 million lower than what you originally reported a year ago. So with the rebasing and the Venezuelan deconsolidation, what's the fourth quarter that we reduce for a sequential comparison?

What is it, [$]125 [million? We would say [$]125 [million] on both. If you look at Q4 and Q1, we do this as a matter of routine, look both year-on-year and sequentially, the biggest driver in terms of this is volume. Some of that's seasonal and some of it is market, but that would account for the vast majority. Simply, you don't have the same coverage in your plants and everything else, which is why first quarter, broadly, is always a low-margin quarter for us, and it's a low-margin quarter for energy as well.

Then it was exacerbated by further market declines as you go in. I would also point out, fourth quarter, as we said during the fourth quarter, had a number of one-time positive events in it, all of them legitimate, but that would probably account for almost $14 million of the [$]125 [million] that just weren't going to recur, which we called out in that fourth quarter. It was simply, we sold some inventory that was out there at one time, which were smart moves economically for the Company, or legitimate deals.

But you don't get to sell that inventory over and over again, so it took risk off the table and triggered a sale and some gross profit realization as a consequence of that. Those things are also part of the story. Then we also had a one-timer negative in the first quarter in Angola that was fairly substantial that needs to be accounted for.

When you take those things, the whole thing makes sense, but the fourth quarter is a little bit overstated and the first quarter is really reflective of low seasonality. We will see improved margin in energy going forward, simply because volume will be greater in the out quarters than it was in this quarter and you'll have better overhead coverage.

And then the Other segment, which has the 16% sales margins this quarter, you're getting almost up to the Institutional area now in terms of margins. We don't have a lot of good history of that segment, given it usually was good margins on pest offset by investment in GCS, but as GCS ramps its margins now, how high does that Other segment get, do you think?

GCS makes money now, so we actually have a margin on the positive there. They have done a good job driving that. Pest has always been a good profit business. Our pest business, you've seen, has reaccelerated. If you recall, a couple years ago, we said we would put it in the shop and are reinvesting in pest in a number of areas, which we've done.

To the team's credit, they have taken that reinvestment and delivered on the top-line performance that they committed to, so that grew nearly double-digits in the first quarter, which is what we had historically expected out of pest, but then didn't see for quite a while. GCS, out of that thing, you can see regularly high teens, maybe approaching -- our goal as a Corporation is 20%, so I'm not really going to be happy until everybody's there.

Okay. Thank you.

Our next question is from Mike Harrison with Seaport Global. Please proceed with your question.

Hi, good afternoon.

Hi, Mike.

Can you hear me okay?

Yes.

Was wondering, Doug, if you could talk about the new Synergex sanitizer product for clean-in-place applications. That's your work horse in the F&B market. Can you talk about some of the risks and the opportunities as you're introducing the next-generation product in that market?

There's always risk if you introduce anything, but there's greater risk if you introduce nothing. So this is one of our core platforms. It's the heart of CIP, and so while we'll talk about what sales are for specific product, it understates its overall importance. This is the next platform of antimicrobial as we move forward.

We need to continue to bring broad-based kill, the absence of bioaccumulation, all the things that we think are very important to have going forward. This is the state-of-the-art antimicrobial, we believe, in that marketplace, and it is very important to us continuing to drive our advantage in that market. We've got the best antimicrobial suite. It just got better with this introduction.

Great. Then I was curious also, you mentioned that you were going to be, or you were splitting the Europe business from the MEA business. Was wondering if you could comment on the margin profile of those two businesses as separated and how they have trended over the past few years, particularly with all the work that you've done in the Europe region?

We've reported regularly that we continue to improve Europe. What we've given you historically is apples and apples to our renaissance program. Europe is now high single-digit margin business in total and MEA is virtually double that. MEA is a strong region in terms of OI margin. If anything, we've reduced it in the near term as we up investments in G&A. We've split this out two years ago.

We've added a number of key division leadership positions, added corporate account positions, added supply chain positions, so we have better ability to get product to customers in that region. Done a number of things which have put us in a better stead to drive growth, which is a real focus in that place, and we'll drive margin after we get growth really cooking, but really right now, it's growth first.

Thanks very much.

Our next question is from Hamzah Mazari with Sterne Agee. Please proceed with your question.

Good afternoon. Just a question on M&A and balance sheet. Maybe given the current leverage, a little over 2 times, how you're thinking about appetite to do a larger deal? Would it be fair to say that you're looking outside energy versus continue to build energy? Thank you.

In terms of -- our capability to do an outside deal, we don't think is governed by our balance sheet at this point in time. We said our goal is to get down to roughly a 2-time EBITDA margin and that's where we are. We think that's the right balance between financial efficiency and also strategic capability, i.e., capitalize or jump quickly if you needed to.

In terms of what we're looking at, our focus has been water, because we believe it's a great opportunity. We continue to look there. We've seen recent institutional and F&B deals. They continue to have promising bolt-ons. We'll continue to do that. Then I'd say healthcare, broadly, is an area that we're still very interested in. We think that's a great market for us and we aim to win in that market.

I would say typically what we set our minds to, we do. It sometimes takes us longer than we would like. You certainly saw that in GCS, but we get there. We end upper persevering and we are going to have a great healthcare business. So those are areas we're looking at.

In terms of energy, we have said we don't want to be dramatically bigger than we are in energy. We've said that for a while. But with that, where there are promising properties or new technologies that we think we can develop into promising annuity streams, we'll do it. We just announced one late last year, a Canadian technology that we bought for that very reason, because the energy team has a very good vision of how to drive that technology into an annuity stream.

It helps customers and helps us. So that's how question look at it. Right now, the market -- there are deals going down for prices that honestly we wouldn't pay. We're going to remain disciplined. We did before. We did the Nalco deal after the froth was over and we'll try to be smart stewards of shareholder money as we go forward.

Great. Thank you very much.

Our next question is from Rosemarie Morbelli with Gabelli & Company. Please proceed with your question.

Thank you. Good afternoon, everyone. You just answered my M&A questions. Moving to pest and equipment, is the 9% top-line growth something that you are looking at going forward and will eventually, and if you could give us a feel for the timing, will we see that kind of a growth rate on healthcare?

I would say we expect -- I would say it's probably better to count on upper single-digits in our Other segment. We do think that's quite real, quite sustainable. They will pop into double-digit land on some occasional quarters and they will be a little lower on some quarters just because of what happens at times. But we think the pest and even the equipment care business have a long road at high single-digit type growth and maybe typically popping even over our 6% to 8% target.

Healthcare, ultimately, it's the same type of business. Our aim is to get that business probably combined with life sciences to be upper single-digit business on an organic basis. Obviously, we may have additional M&A activity in that business and that would push it above that for periods of time.

Do you need the M&A, Doug, in order to get to that 6% to 8% growth target, or can you do it on your own, the way the business is right now?

We don't believe we're missing something fundamental preventing us from doing it. When you look at a lot of the underneath economics -- that business is getting better and that team is on it and starting to get traction on the areas they need to get on and after, the place where we have a unique difference, can own and protect and build.

That business is growing very handily and becoming a larger piece of that portfolio, which is what has to happen for you to see the big numbers out of that business. So no, we don't need anything, but that doesn't mean if there's an attractive property or technology, we would be open to it just as we are in the other businesses.

Okay. Thank you.

Our next question is from Chris Evans with Goldman Sachs. Please proceed with your question.

Thanks for taking my question. Doug, a quick question on energy. Does the shift to these easier oil plays that you cited earlier, does that challenge your return to your prior earnings levels?

The shift is somewhat temporary and mostly notable in, say, even the shale play and everything else, and if anything, it's a game that runs out. So in this very tough economic environment, what folks have done is basically gone to focus on the wells that are easiest to extract and cheapest to extract. That's how they are keeping cash flow going to pay their bills and hopefully survive until the price recovers.

And when price recovers and demand needs to be met because you've got a lot of capital that's been pulled out of that business, they are going to have to go back to the other wells. So the shift is inevitable. You can't meet the demand for oil next year with just easy oil. So this will happen and so then you will see the natural cadence occur in this business again.

Thanks. Appreciate the answer. Then staying with energy just for another one, could you just bridge for me the 15% sales decline to the 42% EBIT in terms of maybe volume, price?

I don't have the bridge in front of me. In almost any business, when you have significant deleveraging in a business, you have almost as immediate significant impact on OI, because there's no time to take out overhead, and I wouldn't anyway because a lot of this is just seasonally. So you get under-absorption in the plants that immediately, instead of going into inventory, hits your OI line. This is just basic P&L stuff.

But 15% is a significant volume hit. We've been under pressure there. We did not build inventory. We're trying to be disciplined on inventory and the other stuff, so we took it on the chin. Last year, if you recall, we were building inventory year-on-year in energy because it took us a while to turn off the spigot in reaction to the market. So you've got even probably more outsized year-on-year impact from absorption than you would under normal times.

Got you. So this is just the volumes, no impact from any pricing decline.

Yes, but in line with what I talked, and not materially different from the other quarters.

Okay. Thank you.

Our next question is from Christopher Parkinson with Credit Suisse. Please proceed with your question.

Perfect. Thank you. Can you comment on your recent new business launches within the water segment in terms of recent growth contribution? Also, any color on the cadence of the potential ramps for the new platforms which you mention for the second half of the year?

I'm sorry. Can you repeat the second half of the question?

Just any color on the cadence of the potential ramps of the new platforms, which you have mentioned in your release for the second half of the year?

In the water business, we have continued expansion drive of our 3D TRASAR units, which continues to go well and move. We've also launched [Stealth] that we've talked about for the light side of the business. Let me just turn onto my page where we've got -- our expected revenue on new launches for water are going to be around $25 million to $30 million this year.

They will build throughout the year. Typically the way I would think about a launch, when we launch a program, it typically takes five years for us to reach peak annual sales. It's not this monster wrap-up. The technology also has legs and we will often be selling technology for at least 10 years before we replace a platform or do other things.

This certainly is obviously longer lived technology than Apple probably talks about. So in terms of expected sales from our cooling water product line, around 3D TRASAR, we will end up with $30 million ultimately this year, but our five-year expected sales, out in 2020, 2021 would be around $100 million.

Perfect. That's helpful. Very quickly, on the food and beverage side, you've mentioned penetrating your existing customers fairly well across your portfolio, one of the things you actually just discussed, but you've also had some new business wins despite a tough environment. Can you just really quickly parse out what you believe are the Ecolab-specific trends here versus what you're seeing in the actual end market on how you're comping versus that? Thank you.

I believe our F&B business is up 4% in first quarter. And certainly, I don't think the food market -- this is a heavily -- processed food, dairy market in particular, is our focus in these markets. It includes protein and other areas. But those businesses are under pressure, so there's no doubt in my mind we're outperforming the market.

The pressure comes in two-fold. One, they are under consumer demand pressure as people move to different parts of the store to procure food. And second, there's been quite a bit of M&A activity in that market, which means ultimately, they consolidate and take out manufacturing facilities, which reduces, temporarily, total opportunity for us.

Long-term, though, the drivers in F&B are in excellent shape. It's called population and food safety. The population will grow around the world. The middle class will grow. Expectation for food quality will continue to increase, particularly in emerging markets. And food safety is only going to get more challenging because, while there's a lot of conversation in the US about local farming, local farming is not going to feed 9 billion people.

It's also not, by any means, the most sustainable way to farm. What you're going to want to do is farm where stuff naturally grows. So you're not going to see bananas growing in Manhattan anytime soon. It doesn't make any sense. It would be local, but it wouldn't be very sustainable. So ultimately you're going to still see long-distance shipping of food to, in particular, feed the Asian population growth, and long distance equals time, and time is the enemy of food safety.

So if anything, we think the demands for food safety technology are going to grow faster than the food demand, which is ultimately going to be driven by the two components I talked about, population growth and middle class expectation growth. So I like our food and beverage business. New technology, team is on it. We're outperforming the market. That business gets better. And the water technology coupling we have is spot-on for that business and is a huge way to leverage our installed base in F&B

Our next question comes from Scott Schneeberger with Oppenheimer. Please proceed with your question.

Thanks. Just to get a better feel for the Industrial segment, I'm curious, nice couple hundred basis points fixed currency margin expansion year-over-year. You said volume gains, pricing, cost savings and lower product costs. I was just wondering, are those in order of magnitude and how it spreads across the subsegments of the business? And then lastly, what we should look for as we move through the year as what the bigger drivers are in the Industrial segment? Thanks so much.

It's like an ingredient list. It's in order of magnitude. What we've said is, the one area, raw material benefits are expected to decline as the year moves on and possibly even move into slightly negative territory by year-end. But the balance of it, volume, pricing, cost savings, are going to be tools that will remain in our quiver that we will use.

Thanks. Across the subsegments, which may be the biggest drivers in Industrial?

You mean, which areas of those are going to be utilized? I don't -- say it again.

Just of the subcategories in your Industrial segment, which do you feel will drive the business overall through the balance of the year? Which of the--?

F&B and core water. Core water is up 6%. It was mining that was down. That business continues to strengthen. That's even with the pressure in steel and other areas. China's tough, but there's always something going on in the world. But water, we think, continues to strengthen. They have got good innovation. They are on the new business.

F&B is in solid shape. Those are the large businesses in Industrial. Textile improved, had a pretty strong first quarter, and we would expect to have a strong year as we go forward. Pretty good -- across the segment, we're in pretty good shape.

Great. Thanks.

Our next question is from Dan Dolev with Nomura Asset Management. Please proceed with your question.

Hi. Thanks for taking my question. Just want to make clear that I understand. In late February, you spelled out 9% to 13% constant currency EPS growth. What is the constant currency EPS growth as of today for the year? What is the expectation in constant currency terms?

I would say at this point in time, we haven't really, as I've said, reflected a change in currency and we haven't changed our range, so it wouldn't have changed.

Got it. So the math that I went through to get you to 6[%] to 10[%], you're saying that's not the right math at this point?

Well, here's the thing. What we've said is, if we snapped a line right now and froze all rates at the rate you see today, and that was the end rate for the year, you're going to have $0.10 less currency headwind than we forecast in late February. But given all the stuff going on in the world, we don't think booking that at this point in time is wise.

There's a lot of things that can change including currency as the year goes on and there's too much time remaining in the year in a very dynamic environment to go snap the line on one of multiple variables. So what we've basically said is we have not changed our expected currency outcome for the year, even though we recognize and admit that today's rates would indicate at $0.10 better.

So yes, if you want to go do that math, but there's a lot of things going in here. We haven't increased our range either at this point in time. As the year goes, we'll continue to try to be transparent in what our expectations are and what's the underlying assumptions leading to our forecasted range, and from there, we're going to watch multivariable inputs and see how it all turns out.

Got it.

But I would expect to deliver on our range.

Got it. Just one follow-up. On more long-term reflective, the analysis that we did for our initiation work two years ago, we looked at your margin growth for the last few years, including and excluding the synergies. Excluding all the synergies that you got from Nalco and Champion, which were a lot, you were probably getting 10 to 15 basis points of margin growth per our math. In Q1, you got about 20 basis points. I assume there was some energy impact. Do you still stand behind the 20% margin and how are you going to get there by 2020?

When we launched the 20% margin, we did that at an investor conference. It was $20 million in sales, 20% margin -- OI margin -- and 20% return on invested capital. I was very clear at that time that we weren't going to hit all three by 2020, because if you did the math, it would imply much more than 15% EPS growth, and what we said is we believe all three are achievable. They are achievable within sight of 2020, but they weren't all going to occur by 2020. And that's still true.

If you go to just the last two years, if 2016 expected FX hit, not the $0.10 better. You've got 2015 and 2016, we lose a $1.5 billion in sales in two years just from currency translation and over $250 million in OI. That's what those rates mean, so they chew up the bulk of the synergies you might have seen from one of those deals. With that, we continue to deliver positive EPS growth as we go through it.

I will also say we also believe that translation FX, not transaction -- transaction FX, we never talk about. It's almost equal in size, but we think that's a real impact in the business that has to be dealt with because it's the equivalent of inflation basically. So we don't talk about it. We only talk about translation, because translation is goofy. If I was headquartered in Munich last year, I would have been up 26% EPS.

With everything happening exactly the same except on consolidating into euros, not into dollars, our business isn't any better. Our share is not any better. Our margins aren't any better. Nothing's better, except I translate into a more favorable currency. So this stuff flips back and forth. So our margin improvement, yes, is real -- at fixed currency, more like 60%, not 20%.

We expect to have continued fixed margin growth year in, year out. One year, it's going to look like 200% because currency is going to go in our favor, and I will tell you it's still only 60%, because really you have got to look at this the way the margin is really coming country by country and currency by currency. That's the way we ultimately realize it over any period of time that matters to a corporation. So that's how we look at it.

There are no further questions at this time. At this point, I would like to turn the call back over to Michael Monahan for closing comments.

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

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