藝康 (ECL) 2019 Q4 法說會逐字稿

Greetings. Welcome to the Ecolab Fourth Quarter 2019 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

At this time, it is now my pleasure to introduce Mike Monahan, Senior Vice President, External Relations. Thank you, Mr. Monahan. You may now begin.

Thank you. Hello, everyone, and welcome to Ecolab's fourth quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO; Christophe Beck, our Chief Operating Officer; 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 and the associated supplemental materials include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the Risk Factors section in 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, pricing, new business gains and product innovation led fourth quarter acquisition-adjusted fixed currency sales and operating income growth, which along with lower delivered product costs and cost efficiency actions, yielded the fourth quarter's earnings increase.

Looking at some highlights from the quarter and as discussed in our press release, acquisition-adjusted fixed currency sales increased 1% as the Industrial, Institutional and Other segments showed steady sales gains and more than offset the decline in Energy. Excluding the ChampionX business, Ecolab's acquisition-adjusted fixed currency sales rose 3%.

Adjusted fixed currency operating income margins increased 60 basis points, continuing their steady improvement. The growth was led by double-digit gains in the Industrial and Energy segments. Adjusted earnings per share increased 8% to $1.66 and were up 10%, excluding the Healthcare recall.

Progress continues on the separation of our ChampionX business. We continue to expect the transaction to be completed by mid-2020. Looking ahead, our work to drive sales momentum showed improvement in the fourth quarter with ongoing business volumes up 1%, excluding ChampionX and the recall. We are driving new business wins, focusing on our innovative products, sales and service expertise and our value proposition of best results at the lowest total operating cost for customers. We also continued driving productivity and cost efficiencies.

Our fourth quarter slides and earnings discussion, including earnings bridge for 2020, as shown, we expect strong operating earnings growth for the full year of 12% to 15%. However, we will also face some headwinds in 2020, including $0.08 from the impact of lower interest rates on our pension plan, $0.04 from an unfavorable currency exchange and the impact from the coronavirus outbreak, which we estimate will cost us $0.05 in the first quarter with the remainder of the year not estimated or forecasted at this time.

Net of this, we look for 2020 adjusted diluted earnings per share to rise 9% to 12% to the $6.33 to $6.53 range as improving volume and further pricing gains, along with cost-efficiency benefits, more than offset the impact of business investments and the headwinds just mentioned.

First quarter adjusted diluted earnings per share are expected to be in the $1.05 to $1.13 range, up 2% to 10%, including an estimated unfavorable $0.05 per share impact from the coronavirus outbreak.

In summary, we expect improving top line momentum in our business in 2020. And along with our ongoing work to expand margins, we look for 9% to 12% adjusted earnings per share growth. We continue to make the right investments in the key areas of differentiation, including product innovation and digital investments, to develop superior growth for this year and the future.

And now, here's Doug Baker with some comments.

Thanks, Mike, and hello, good day to everybody. So I'm going to touch on 3 subjects: first, Q4 and full year 2019; I'll touch on the Healthcare recall; and then finally, our 2020 outlook, including coronavirus.

So first, Q4 and 2019. I'd characterize '19 as a very productive and successful year for us, and we realized very important outcomes in Q4 specifically. So we dramatically derisked the business. We positioned it for even better future growth and we delivered double-digit adjusted EPS growth and strong cash flow growth for the full year.

We derisked by moving from a 45-plus year-old ERP system in the U.S. to SAP. This is never pain-free, and much of the field execution load fell in early Q4. But our team did a great job managing this. The lion's share now of the cost and risk is behind us and in the base.

Second, we successfully separated the Upstream business. It is now operating as a stand-alone with its own supply chain and ERP systems. This is a huge amount of work also, but the right work, and again, is behind us and in our base.

Also, we continue to make the talent, innovation and digital investments needed for future success. We talked in Q3 about our gear shift from price then new business to new business then price as a priority order. This, too, this shift has been quite successful. We are continuing to realize price gains and importantly, have had huge quarters in terms of new business wins in both Q3 and Q4, which we will realize over the next few quarters.

So while all of the above was planned, we had an unfortunate unplanned event in Q4, too, and that's the European Healthcare product recall. This had a significant impact on our Healthcare sales and on Q4 EPS.

The plant -- the Healthcare plant in question has now been decontaminated and has been producing again since mid-December. There will be some residual cost, but the big cost pain is behind us. And the team is in full recovery mode and making very good progress.

So as we enter 2020, we do so with a clear focus on growth. Our huge SAP and Upstream separation projects are largely behind us. Healthcare Europe is back producing and selling, and we enter with very strong sales momentum as a result of our new business wins talked about earlier.

So even with the challenging environment, we expect a strong year in 2020. We expect our sales to strengthen throughout the year. We expect continued gross profit improvement from continued pricing efforts and a modestly improved raw material environment. We expect our new digital innovation to also continue and bear fruit. And we have a strong M&A pipeline and recently announced the acquisition of CID Lines, a leading provider of animal health technology.

Net, even with a challenging backdrop, we feel well positioned and are forecasting continued strong cash flow and double-digit adjusted EPS for the year at the midpoint of our range. This includes a negative $0.08 from pension and a negative $0.04 from FX for the year. It also includes a $0.05 hit in the first quarter from coronavirus but does not include any potential impact in Q2 through Q4 because at this point, it's impossible to estimate.

With that said, we are assuming that the global economy avoids recession in 2020. Net, we feel very good about where we stand as a business, and we're quite optimistic that we can outperform again in 2020.

So with that, I'll turn it back to Mike.

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

(Operator Instructions) Our first question is from Tim Mulrooney with William Blair.

Yes. So the ChampionX business, how much was it down in the fourth quarter? And what has the performance been through the first half of the first quarter?

Yes. The sales were down 6% but operating income was pretty strong. And what we've really been focusing on in that business is making sure that we're doing the right things from our margin and focusing on profitable growth. Importantly, if you break apart the Upstream business, you've got Wellchem, which is closer to the wellhead. You've got our traditional OFC business. And the OFC business, which is, by far, the larger of the 2, continues to do quite well.

Okay, Doug. So organic growth at the RemainCo at Ecolab was up 3%, excluding ChampionX. I'm wondering if you could provide that for operating margin. Operating margin was up 60 basis points in total, I think, is what you said. But what would that have been up excluding ChampionX?

In fourth quarter?

Yes, in the fourth quarter, yes.

Yes, we're looking. It's up a little bit. It's also up about 60 basis points in fourth quarter.

So kind of a neutral impact?

Well, it was because you had the Healthcare recall, right, as well in the fourth quarter, which really impacts the RemainCo business negatively.

Our next question is from the line of Christopher Parkinson with Crédit Suisse.

In Industrial, chemical and power applications still appear a little sluggish just on a relative basis versus your best performance in light and F&B. Is this simply subject to macroeconomic factors? There's something else in the...

Sorry, can you repeat that? Chris, can you repeat the question? It's coming so -- quite muffled.

Oh, I apologize. So in Industrial, chemical and power applications still appear sluggish on a relative basis versus your performance in light and F&B. And I was just asking, is this simply subject to macro factors? Or is there something else on the new product front we should be looking for as we head into 2020?

Chris, what I'm hearing is you're asking why was chemical and power softer for water.

Yes. And what you can do -- is it macro -- is it primarily macro that needs to drive the improvements? Or is there something else you can do to improve those 2 subsegment performance?

Power primarily reflected the shift towards natural gas in the U.S., where natural gas requires less than coal. And the chemical, I think, was probably somewhat industry trends and just, I think, timing of some new business.

Yes. There's nothing fundamental going on in the heavy business other than the big transition we just talked about. And clearly, Industrial, right, performance levels broadly, are going to have some impact on that business, too.

Got it. And then just as a quick follow-up. When you talk about enterprise selling efforts within F&B and light water and then we think about your presence in Pest Elimination, can you just comment as to which geographies are driving these benefits and whether or not you're going to need to broaden your global breadth on the latter, i.e., Pest Elimination, to replicate these benefits, assuming the bulk of the momentum is driving in the U.S.?

Yes. We've combined a lot of the way we go to market in the food and beverage space, combining the water business and the F&B traditional business and then often bring in pest, too.

The F&B and water businesses are truly global. The pest business is not as global. We have good presence in Europe, obviously, cover all of North America. And then we have a few businesses in Asia and Latin America but do not cover all those markets.

With that said, we've had a lot of success driving, if you will, enterprise selling efforts, particularly in Food & Beverage where we focus first. Pest comes along quite frequently, but the pest business gains are going to be most frequently found in Europe and U.S., just because that's a large presence.

The next question is from the line of David Begleiter with Deutsche Bank.

Doug, looking at Institutional, the division, not the entire segment. What do you think that can grow in 2020? And what's the progression from early to late over the course of the year?

Yes. So when we talked about Institutional last, we talked about -- we expected it to end at a run rate of 4-ish percent. And if you look at underlying sales, particularly in the U.S., we got very close to that number if you round up.

The expectation for that business is that we'll continue to strengthen sequentially. What it's going to report as is going to be a little different given coronavirus and some of the other impacts. But the underlying business, we expect to continue to strengthen.

We expect the year to be in the 4-ish range, which means it's going to be a little less in the beginning and probably a little more at the end as we go throughout the year. We, of course, are challenging the team to do better than that. But I would say, I think the fundamentals in the Institutional business are getting better. We wish we are getting better faster, but that's always our perspective, but they are moving in the right direction.

And Doug, in the same bent, I think you discussed -- any competitive dynamics vis-à-vis Diversey over the last few months here?

No, there hasn't been any big change or activity in the last few months. I think there's still -- they've had some change in their business. We haven't seen any difference in direction as a consequence of that. So no, I wouldn't really say -- I don't think that's going to be really the fundamental change for us.

Our next question comes from the line of Vincent Andrews with Morgan Stanley.

This is Jeremy Rosenberg on for Vincent. I want to start off on the cost-savings program. I think it's $325 million. You guys did $80 million of that last year. I'm just wondering how much incremental you have baked in for 2020. And I do have a follow-up.

We have $130 million incremental baked into the plan this year.

Okay. Got it. And then just thinking about free cash flow for the year, maybe just your thoughts on the outlook. Any thoughts on working capital and CapEx?

Yes. I'll hand it back to Dan.

Yes. Thank you. So maybe we'll just start with a quick recap of 2019.

As Doug referenced upfront, we had very strong cash flow throughout the year and finished the year strong as well. So we had a voluntary pension contribution of $120 million in 2019. And if you exclude that, our free cash flow was up about 20% with 109% conversion rate. So behind that number was improvement in inventory. We commented during the year that one of the consequences of having the supply chain so focused on the SAP go-live was maybe not pushing quite as hard as inventory reductions and in fact, building some finished good inventory.

So looking ahead to 2020, I guess, I would steer you toward what fundamentally the way is that we think about it, which is that we will continue to see very strong cash flow and strong cash flow conversion, which we anticipate to be in the range, again, of 100%, maybe slightly north of reported net income.

So 2020 will be another strong free cash flow year for Ecolab.

Our next question is from the line of John McNulty with BMO Capital Markets.

With regard to the areas that you're starting to see kind of the increased volume from the shift maybe a little bit away from price and more into the volume front, can you articulate a little bit as to which areas you're seeing the kind of early traction, the early wins and how we should be thinking about how that progresses throughout the year?

Yes, John, I'll just add. I'm going to have Christophe answer this. I mean Christophe early got the team very focused on this shift middle of last year, which is why you started seeing the results in Q3, Q4. And it was a very important shift for us. We know pricing, ultimately, given inflation and other things, isn't going to carry you forever, and we had to get volume growth moving again. We saw a 50-point improvement in volume. If you adjust for the Healthcare recall from third quarter to fourth, we expect to see more.

Christophe, I'll ask you to give a little color on where we expect to see it.

Thank you, Doug. Yes, it's been a very collective effort that started to become really strong in mid of 2019, which has really generated record new business generation during the second half of 2019. We've seen that mostly in the Industrial businesses at the beginning where we had so strong a momentum and that's why you've seen as well Water and F&B have been up 5% as well, Life Sciences 13% as well and then progressively as well moving towards Institutional, Specialty, Pest, that will as well lead to better results going forward in 2020.

Great. And then just with the SAP system up in North America, any insight into new targets, opportunities, whether it's on the working capital front, on efficiency measures, anything notable with the early start of that?

Yes, I would expect, ultimately, all those things will be targets that we'll get after. What we've seen early is, I would say, we recently had a review with our Institutional business. And they're already talking about the transparency that they have that they didn't have before in terms of what's happening in specific customers with specific categories. They can see their shipment costs much more clearly and understand, I would say, ramifications of shipping policies, how you might tweak those and enhance, if you will, our ability to both meet customer needs but do it cheaper. So I think there's going to be a multitude of areas. Putting these in, you're glad it's like a lifetime event because nobody would do it twice, but we're very happy we're through it and now it's starting to bear fruit.

Our next question is from the line of Gary Bisbee with Bank of America.

Guys, I guess as a first one, can you give a little more color on where you expecting the business to see the coronavirus impact? I think in the prepared remarks, you called out Water and Pest. But is it broader than that? And any more color on how much it's impacting your ability to produce product versus sort of customer pull/demand at this point? I realize it's fluid, but any color would be helpful.

Yes. I'll -- let me just state on coronavirus. I think there's 3 levels of impact, and we'll answer your specific question. I'll have Christophe do it after I go through this.

There's certainly market demand in China where that's the principal ground zero right now of coronavirus. So market demand is an impact.

So the secondary impacts are really, what's it going to do to global supply chains? Now it won't impact our global supply chain. We have plants in China, but they're really for China consumption. We don't use it as an export market per se nor do we rely on specific parts from China for production in other regions around the world. So it is a big worry, I think, broadly about its impact on supply chains. It's not a specific worry for us.

But then the third impact is what's it do ultimately to global GDP. And that really is a question of, "Does it spread? How long is it? And if it doesn't spread even, how deep and long does it last in China?" And there are all kinds of scenarios. The traditional scenario is these burn out fairly early, like in March/April as weather gets warmer, but it's very hard to predict exactly what any of these are going to do. And if it does spread, obviously, you've got additional impacts. And if it goes deeper, say, into June, and you really have this outage for other supply chains, it's going to have broader impacts.

For us, the impacts have been really China-specific. I would expect them to remain China-specific. But in terms of the global GDP, we're probably going to be not as impacted as other companies. But obviously, if global GDP goes down, it's not healthy for any company, including ours.

So with that, I'll turn it to Christophe to talk about the impacts we're seeing right now.

Yes. Just say 2 things. So on one hand, we are in the infection prevention business. So customers have a natural tendency to come to us for help. But that's a little part of the business to help them to prevent the spread of infection. So long term, it's going to be a good thing. And we're strengthening the relationship with customers locally and globally on that, but there's not much we can do as well for restaurants and plants that are closed as well in the meantime.

So kind of a short-term negative impact, but long term, probably something which is positive for our relationship with customers.

Great. And then just a follow-up. A couple of quarters in a row, you've -- and we've seen this in the past, obviously, you talked about bookings momentum building. We don't see a lot of it in the organic constant currency growth rates yet. How do we think about -- or how long it takes to onboard new business? Is it very different from business to business? And how quickly should that start to flow through to revenue?

Yes, good question. This is Christophe. So it depends, obviously, business by business. Some are much simpler. So the more institutions or restaurants-like type of business or goes quicker, it can be done. So in a few months, usually, we think a quarter or 2 to get that rolled out.

We talk about chains, usually. So when we talk about the regional chain, a global chain, well, that can't happen overnight, but it's kind of a quarter or 2.

When we think about Industrial businesses, so it's plants where much more engineering work needs to be done, that's usually between 2 or 3 quarters.

Our next question is coming from the line of Scott Schneeberger with Oppenheimer.

I'll just start real quick on a follow-up on Gary's question about -- I think, in the hand off, Doug, from you to Christophe, you covered it -- just it's in -- on coronavirus, it's in China and then those 3 categories.

But was it consistent with what you have in the press release of just Water and Pest? Or is it more broad-based? Is it like $0.04, $0.01? Just kind of curious by segment. And then I have a follow-up.

Yes. And I would say the specific impacts in industries, we're seeing it clearly -- I mean, it all makes sense, right? Hospitality, travel is way down in China. Hotels are clearly impacted. Food service is clearly impacted. You have a number of chains that have shut down half their units in many instances.

We have then, obviously, Industrial production, which you're speaking to, which has also been curtailed. I mean they extended China New Year for at least another week, and they've talked another week. It's really different by province. You have a number of plants that are working to start back up, some have. All of ours are back up and producing at this point in time. But they were down for several weeks, and others were as well, and some take longer to ramp up. And the closer you are to widespread outbreak centers, the longer it's going to take for them to start up production.

Appreciate that. Then you've been exiting -- in Institutional, exiting lower-margin businesses recently. And just wanted to get a feel on what that impact might be early in 2020 and where you stand on the curve of optimizing the portfolio from a margin perspective.

Yes. So I'm going to give the answer then I'm going to go. The lion's share of that is behind us. There's a little dribs and drabs coming in, but you know what, we're done talking about it.

Fundamentally, we've seen the impact. We're moving on. We start -- we will expect, like we saw on fourth, continued improvement sequentially moving forward. I would say it's much more in the normal range of what we have. We have some attrition every day. It's small, but we have some and this is much more in that normal keeping at the point in time, especially as we go throughout year.

The next question is from the line of P.J. Juvekar with Citi.

Doug, this is Eric Petrie on for P.J. As you look at your share repurchases in 2019, it's been the lowest level since the year -- I think, since 2013. So how do you see buybacks shaping up into this year and going forward versus the M&A pipeline?

Yes. A lot of the impact last year was a consequence of us being out of the market because of the negotiations around the subsequent announced RMT.

So we were blacked out for periods of time that were unusual. And as a consequence, we couldn't really talk about this in third quarter or others, right? We weren't able to buy because we're negotiating.

With that said, I'll hand it to Dan to talk about forward view.

Yes, sure. So one of the consequences of the split transaction prior to the RMT with Apergy is that we will be out of the market essentially for the first half of the year.

We have said before, or I guess I'll say again that when we look forward beginning in the second half of the year and look at the cash dividend payment or cash payment that we will receive as part of the Apergy at RMT, we will evaluate at that time whether or not the better uses of our free cash flow are for share repurchase or debt retirement. Our cash flow priorities, importantly, will remain consistent. And I guess, at this point, looking so far forward, I'm comfortable saying that we will repurchase shares at least a level to offset the impact of our share-based compensation plans and at the margin.

This will be a decision that we make when we get clarity on the market and what the best opportunities are.

Okay. Secondly, at Investor Day, you talked about roughly 13% of sales being digitally enabled in Industrial of 1% and Institutional. How do you expect that to grow in 2020? Or do you have a target step-up in mind per annum? Or how do you view that internally?

So maybe to give you just some colors, we don't have formal numbers that we share usually with that. But based on what we said at Investor Day, so the numbers are still right.

What's good is that those sales, which are sort of digitally-enabled, we have 2 categories: one which are the ones connected to the cloud and the other ones that are enabled, basically. Both of them together, $1.3 billion roughly. It's growing double digits. So it's something which is good, and we expect to the same type of growth that we've seen in '19 continue in '20, which is basically helping the rest of the business continue to grow.

Our next question is from the line of John Roberts with UBS.

What was the root cause of the plant contamination in Europe? And what fixes have been put in place to keep that from happening again?

Yes. It was a waterborne bacteria that ended up creating a biofilm in parts of the plant. And biofilms are -- we make a business of cleaning up biofilms in other facilities. So the good news is we had the technology and know-how to go clean this.

And the challenge with biofilms is they don't leak out bacteria evenly. It's more sporadic. And so you end up with some batches contaminated, some not. When they are contaminated, the biofilm itself sort of envelops the bacteria which normally would be killed by the product, but in some cases, is protected. So they're a bit gnarly.

So we've done a number of things. One, we believe we know what the source is, and it was a one-time impact of, in part, moved equipment that occurred just before we bought the business.

But with that said, we know this is a waterborne illness. It's naturally occurring and found in many water sources. So we have significantly upped the capability we have to ensure that the inbound water is absolutely bacteria-free. We've gone through the plant and redesigned a number of dead-end areas. We're going to continue to do that. We have new aggressive protocol put in place that, frankly, is much more aggressive than we think we need, but we're going to make a new mistake going forward. So we've taken a number of steps. The team has been all over this. We're back producing. We're through the 80% of previous production volume heading to 90% and then over 100%. So I think the team has done a good job getting this back up, running and contamination-free.

And then Healthcare sales were up 3%, excluding the recall. Does that business grow above 3% near term now that the plan is fixed? Or did you lose some business that will cause you to grow below 3% here for a little while before you come back?

Yes. In the nature, I mean, this occurred in Europe. And so there's still going to be impact in the first quarter because December is part of our international first quarter. And so we're through it, but that impact is still going to hit part of Q1 but not nearly at the same level as it did in the fourth quarter.

That is, by the way, in our forecast. So it's not any new news that's coming down the pipe.

Yes, I would expect there's going to be a pipeline refill that will occur. Certainly, we're going to go annualize against the recall event in the fourth quarter. You would expect to see larger sales as a consequence of that. At this point in time, I can't give you blow-by-blow if we lost any business as a consequence of this. It's a real possibility, but something that we are going to certainly work to earn back, if that's in fact true. We do not have any numbers on that at this point in time, and I don't believe that's going to be the main story.

The next question is from the line of Jeff Zekauskas of JP Morgan.

Your Energy business had revenues that fell in the fourth quarter, I think by $32 million, and your operating profits were up 11%. How'd you do that? How did profitability improve so much?

Yes. Well, there's been a lot of work on cost savings, a lot of work on formulation work, i.e., how you produce efficacious formulas, at least at equivalent value, not better at lower raw material input costs.

We talked about this work in previous calls. When you're on the high trajectory growth rate, you -- all you're really working to do is meet demand. We've had a period of time here where we've been able to reformulate lower, if you will, the cost of goods, kind of on a permanent basis. And I think the team has done a very good job doing that. It allows them to compete in a much tougher environment effectively. So a lot of the work there. There's been a big focus on specific businesses where we were upside down in cost. There are some parts of the North America OFC business that were not going to work from a mass standpoint. They've taken out heads, retooled work, made sure that we can meet customer needs in a more efficient way. It's all those things combined.

We expect even moving forward in the first quarter, we're going to have probably sales decline and significant OI growth in that business. So the OI EBITDA trajectory of that business is quite favorable.

Ultimately, I don't believe the oil story. It's like the last spike we've ever seen in oil. It's kind of hard to call a 80-year cyclical business no longer cyclical. I just don't fundamentally believe that. And I think the business is poised well going forward.

Okay. Your incremental gross margin was over 100% in the fourth quarter. Was that mostly price or raw materials? Or how would you analyze the sharp improvement in your incremental returns?

Yes. I mean it's a combination of 2 things. I mean we continue to secure price and we'll continue to secure price going forward. And we also had softening of the raw material markets, which we had forecast as well.

So when you get the combination of those, you end up with happy news in your gross profit line.

Our next question comes from the line of Rosemarie Morbelli with G.research.

Doug, when we look at top line growth excluding -- adjusted for acquisitions, so we have water, up 5%; Food & Beverage, 5%; Life Sciences, 13%, et cetera.

Were there anything specific in those particular type of growth rate? Can we put that 2% price in all of them? Or was it mostly demand? And do you expect the demand at this level to continue in 2020?

Yes. I'll add a comment and then ask Christophe to follow on with some additional specifics.

I would say that our assumption for economic growth in 2020 is that it's positive but below 2019 levels. But that's good enough for us, we believe, to end up with better sales growth in 2020 than we saw in 2019. So it's positive, not global recession, but not at the 2019 level.

And the reason we feel that way is, one, the strong new business results that we had in Q3, Q4, we talked about the lag. It takes a while for that business to show up. We're starting to see it. We start to see a bit of it in fourth quarter. We expect to see more of it in Q1.

The hardest thing is going to be looking beyond coronavirus. We'll do everything we can to be clear there. But obviously, that's going to impact Q1, for sure. Q2, likely. I just -- it's hard to predict. But if we look at sales ex China, right? In virtually every category, our expectation is that the business strengthens. And the reason I say ex China is it's just trying to take away the unknown of coronavirus out of the equation, and it is because of the new business efforts.

And I'll throw it to Christophe, if you want to add any additional color.

Rosemarie, this is Christophe. So in trying to build on that, so the demand is not extremely strong as such from customers but -- and I'm excluding the disease -- the virus impact that Doug has covered in here. It's mostly so internally-driven.

We have offerings of our customers that are very unique. You were talking about life science, for instance. Many of our customers are mostly also cleaning with soap and water while the technology, the chemistry, the service, the expertise that we're bringing to those customers is absolutely unique and helps them also to be operating in a much safer environment and to do that at a much lower total operating cost as well.

Beyond that, so we have very unique corporate account management structure. As you know, we have this Food & Beverage global solution, corporate account organization that is really bringing together water and hygiene in a very unique place. Most of the competition can't do that. So we're in a very unique position to offer that to our customers. And ultimately, what's also interesting is that, well, we do that in ways that gives them a high return. So it's not a cost question. It's a total cost. The more they invest with us, the better off they are with their own operations and that's driving a lot of demand of what we're doing.

So ultimately, that's what we've been doing in the last 2, 3 years, Rosemarie.

Okay. And then following up quickly on pricing. You had 2% growth rate overall this year. Should we anticipate that next year will not be any more than 1% as raw materials are coming down and eventually, there is going to be some kind of a balance between the 2?

Yes. You know what, Rosemarie, it's going to be -- look, we round above a 2 this year, and we'll probably round to a 2 in 2020. It's not going to be reported as a vast difference. But clearly, our -- we expect pricing to be positive in 2020 at a lower rate than 2019, but not dramatically.

The next question is from the line of Laurence Alexander with Jefferies.

Just want to follow up on one of the earlier coronavirus discussions.

Can you put this in longer-term context? When you look at other outbreaks that Ecolab has had experience with, what does it take for it to turn into a sustainable change in Ecolab's brand position in the affected region or longer-term growth rate as opposed to a blip in operations?

Well, the past ones, I mean, be it H1N1 or SARS, I mean, SARS is probably the most well known. SARS is a different animal. It was less contagious but more deadly, probably like 5x more deadly but easier to contain because it's really the -- how easy is it to transmit to other people is the #1 factor and how easy or difficult is it to contain. And unfortunately, this coronavirus appears pretty effective at being transmitted from one host to another, to use like, the science term.

I would say this. I think our guess from the literature we've read, from our scientists' viewpoint is coronavirus is -- whatever happens during this season is likely going to reoccur in other seasons, much like you see the flu and others. And I don't know if this is going to have a fundamentally huge change in people's perception of us.

I think if you go to China, we're viewed as the food safety, antimicrobial experts in that country. We've had very good relations and worked very well in coordination with the Chinese government to China FDA, et cetera, for a number of years. We'll continue that work. Our customers rely on us in these instances. I think if you go back to H1N1, that was really the advent of all the hand sanitizers you see in lobbies of all commercial buildings. Before that, it didn't exist. So it clearly changed the demand permanently for hand sanitizing products, et cetera. You may well see that kind of outcome as a consequence of the coronavirus, too. That's harder to predict.

And then there's been some discussion in China moving from the open markets to more industrial food production. Would that provide sort of a faster growth ramp for Ecolab in China? Or should we think of it as not really affecting your growth rate?

Well, certainly, I think there will probably be some changes in the way they think about the live markets going forward. And as -- I mean, the food has been shifting there to more prepared, more production food for quite a while. And that trend, I would agree with you, this is going to be more an accelerant of that trend. It's certainly not going to slow that trend down. That's been a very positive trend for us because when you're doing large-scale food, you need to make sure that your food safety is really good or you're going to poison a lot of people at one time. And so all that move has been quite positive for us. We've always expected that to continue going forward, and I don't think coronavirus is going to do anything but accelerate that. But that again, hard to predict.

The next question is from the line of Mike Harrison with Seaport Global.

Was wondering, in the Specialty business, you noted in some of your prepared remarks the strength in the food retail portion of that business. You mentioned new accounts as well as some new program introductions. Can you give us a little bit more detail as to what has been driving the strength in that food retail business?

Yes, that was one of the early adopters of digital. So clearly, our program, which is now coupled with digital, allows us even more transparency and better communication with customers, so they have more visibility as to what's going on in their stores has helped. We secured a number of new chains in that business as we have in a number of businesses.

That's always been a little bit of an elephant hunting game. So sales can -- sales growth, it grows every quarter. It will grow faster, obviously, after you land a couple of these large chains. That's the situation we're in. But the truth is we have a number of those stories. Pest has had a lot of success securing new business. Institutional had a very good fourth quarter in terms of net new business gains. And we continued with a strong performance in F&B and the Water business as well. So it's across the board. I'd say the Industrial side was quicker off the mark, but now we see across the businesses, the success in net new business wins, including in FRS.

Right. And then I wanted to ask about the Energy business. You mentioned some increase in international sales that were driving the Downstream business. Did you get some new wins there that should end up meeting sustainable growth for the Downstream international business? Or was there something maybe more temporary going on that helped you this quarter?

Yes, nothing notable. I would say it's probably better execution in the quarter but no fundamental change. That business is focused on new business. We've got great programs there. And we believe increased focus on execution is going to pay dividends there as well.

The next question is coming from the line of Shlomo Rosenbaum with Stifel.

Doug, the -- part of the Energy business that you're going to retain in the Downstream business was up kind of moderately, and I understand that it's generally more of a mid-single-digit revenue growth business. Could you talk about what was going on in the quarter? And when you do see variations in that business, what part -- what percentage of that business is really kind of very steady, and what part kind of moves around?

Yes. I mean the fundamentals of that business are quite similar to the rest of our water business, to be honest, which is it's an annuity-type business with deep embedded service and capability around technology and understanding the types of crudes that are being refined, what needs to be done, how do you treat the water -- the captive water and boiling and cooling, et cetera. With that said, there's also an additive component to that business. So much like Circle the Customer execution in other industries, we've also done the same in that industry for a number of years.

And so the additives can be a little more up and down based on consumption and/or seasonality. The fourth quarter for that business, sales were around the 3% rate. They were fairly solid. It was the best growth that we had all year in that business.

So I would say, to your point, we do view this as a mid-single-digit type business going forward. It treats not only fuel refinery businesses but also petrochemical plants. And long term, for sustainability, we are going to need plastics and derivative-type lightweighting products to enable fuel efficiency and other things. I mean that's what the world is counting on. I know plastics are under a lot of pressure. There are good plastics and bad plastics, and we make sure we don't throw out the good plastics with the bad plastics.

Okay. Great. And just as a follow-up, just on the Pest business, it's generally been kind of 6% to 8%, came in at 5%. I know there's some timing of new business. Is there anything to call out over there? Or just kind of that's the kind of the ebbs and flows of the business in general?

Yes. No, honestly, we're feeling pretty good about Pest. We don't like the 5%, but we like the fact that it was coupled with an incredibly strong new business win portfolio in Q4, too. So we expect that business to accelerate.

Mr. Monahan, there are no further questions at this time. I would like to turn the floor back over to you for closing remarks.

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. Thank you for your time and participation. Our best wishes for the rest of the day.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may now disconnect your lines at this time, and have a wonderful day.