藝康 (ECL) 2020 Q3 法說會逐字稿

Greetings, and welcome to Ecolab's Third Quarter 2020 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mike Monahan. Thank you. Mr. Monahan, you may now begin.

Thank you. Hello, everyone, and welcome to Ecolab's third quarter conference call. With me today is Doug Baker, Ecolab's Chairman and CEO; Christophe Beck, our President and 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 in these materials, which state 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 September 25, 2020, Form 8-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. Third quarter results showed significant improvement from the second quarter while still reflecting the divergent impacts from COVID-19 on the business segments. Fixed currency sales and earnings per share declines narrowed as we leveraged recovering customer end markets with new business wins, increased customer penetration and cost efficiency actions to show the sequentially better results.

Sales and income for our Healthcare and Life Sciences segment were strong as it continued to benefit from good underlying business trends, strong cleaning and sanitizing demand and several large onetime sanitizer orders.

Our Industrial segment saw a modest sales decline as end-market activity returns toward more normal levels, while income growth continued to be strong due to pricing and lower costs.

Institutional division results also improved from the second quarter as consumer activity within restaurants, hotels and entertainment facilities continue to recover, though traffic at them continues to run below last year due to COVID-related restrictions that yielded the lower Institutional segment results.

We expect our overall improvement to continue in the fourth quarter, though likely at a slower rate, as the second COVID wave impacts reopenings. We remain confident we will emerge from 2020 with a stronger competitive advantages and a more robust product offering.

We continue to invest in the key drivers for our business. Our accelerated investments in hand care and sanitizing capacity are paying off, and our continued digital investments and accelerated field technology deployment are enabling us to provide excellent customer support, even where we cannot be there in person, while also enabling better value delivery and further efficiency in our cost to serve.

We remain firmly focused on maximizing our post-COVID position. While COVID-19 creates a near-term challenge, it also creates long-term opportunities. In a world challenged by COVID, our food safety, clean water and healthy environments positioning has become even more important. We believe that our long-term growth opportunities remain robust driven by our huge remaining market opportunity; our leading global market positions; our focus on providing our strong customer base with improved results while lowering their water, energy and other operating costs; and our strong financial position with resilient free cash flow. We believe looking beyond the near-term uncertainty and focusing on these sustainable long-term business drivers will yield superior long-term performance for Ecolab and our investors.

And now here's Doug Baker with some comments.

Thanks, Mike, and good day, everybody. So our sales and earnings showed significant improvement in Q3 versus the lows we saw in Q2, which was expected. This is led principally by our Institutional division as its markets reopened albeit partially. Our Healthcare and Life Science businesses continued to accelerate with our third quarter sales up 29%. And our Industrial businesses performed solidly as well with negative 3% sales but 18% OI growth.

Importantly, we expect the overall improvement to continue in Q4, though at a slower pace, as COVID second wave is expected to dampen reopenings. Even so, we have a number of initiatives underway as the opportunities and challenges presented by COVID are much clearer now. We have a heavy up and front -- upfront investment in hand care and sanitizer production, which is now coming online and starting to pay off. Our launch of new antimicrobial with best-in-class 30-second COVID-19 kill claims are well-timed. It's just going out now. Our continued investments in digital and our accelerated rollout of our newest shield technology is paving the way for further efficiencies and our cost to serve, which we are capitalizing on now through targeted cost-savings programs.

Finally, our new business efforts continue to drive really good results, particularly in Institutional. Our ability to dramatically outperform our competition in terms of customer care during the COVID period is being rewarded with new business across the board. And our new Ecolab Science Certified program is helping drive improved penetration in existing customers.

If you recall, our objective for this year was to maximize our position for post-COVID success, and we are well on our way to do that. As a result, we feel we'll be in very good position leaving the year. As we look forward, we expect COVID to run into 2021 fairly deeply, meaning through several quarters, but we also expect our business to continue and strengthen as our capacity, innovation, new market entries, Ecolab Science Certified and digital efforts put us in a great position to manage and grow our business. So I feel really good about the steps our team has taken; how they've managed through this period; and most importantly, how they position us for success in 2021. Thank you.

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

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

Doug, I know there's a lot of uncertainty right now and a lot of moving parts between your different segments. But I think a key question for me and what's on a lot of investors' minds this morning is, based on what you know today, when do you expect to get back to 2019 EPS or better?

Yes. Well, thank you, Tim. I would say we're not giving specific forecast, but I'll say this. Even with COVID second wave, and I think we've -- we understand where COVID's going. We track it very carefully, meaning all the recent news reports about what's happening in Europe, what's happening in the U.S. is not really news to us per se that we've considered this in thinking about our business progression, even when we talk about further improvement in Q4 and how we're considering 2021. That doesn't mean it couldn't be worse than we anticipate or could be better than we anticipate, but I don't believe we are underestimating COVID.

With that said, I think we are in good shape to be playing above 2019 EPS in 2021. The question is really how much. We've got a number of things that give us confidence. The markets, we believe, are going to be better, on average, in '21 than they were in '20, principally because we don't expect a repeat of a global shutdown during the March, April period. That alone drives, on average, a significant improvement in just underlying market performance.

Inventory reduction is really behind us. Dishmachine rent relief isn't going to be repeated, a lot of the one-offs that we had talked about that we took purposely in Q2. And we know we've gained share. We've got very strong innovation. And we've added capacity on hand care, where, honestly, we could sell more if we could make more, and now we're able to make more. And ultimately, we know we're also taking steps to lower our costs.

So we feel we're well positioned next year. We've got a number of levers to pull. And so I expect sitting here today that we will be certainly above 2019 EPS in 2021.

Okay. That's really helpful. Appreciate your thoughts there. I'd also like to ask about your new business wins and how that trended through the quarter relative to your expectations. Are these wins coming from developing growth opportunities? Or is it more just from recovering end markets? I know you've got a lot going on with new sanitizers and science certified, for example. So I was curious how that's all affecting the cadence of your new wins.

Yes. I'll ask Christophe to go address this. But we've been, I would say, very surprised at the strength. We were worried early in COVID with the fact that we couldn't make in-person calls in the same manner that we did prior, impact our ability to get customers to yes. And that's turned out to be a false worry. We've actually performed very well through this whole period.

And I'll give Christophe an opportunity to give you some color.

Thank you, Doug, and Tim, good morning or good afternoon. So yes, new business has been going very well this year when we think year-over-year growth of new business that we track. So on a monthly basis, it's basically growing at the same pace as it used to be as well, so pre-COVID, which is very encouraging.

Doug is right as well. So installing that new business has become a bigger challenge, which means that our full book of business ultimately will help us as well down the road. But we've leveraged as well digital technology. So to do that in unbelievable ways where we could install new customers all remotely, so we've learned as well, and those are capabilities that we can use as well tomorrow.

And to your question on the main drivers. I'd like to come back as well to what we discussed during the previous calls as well, where many customers are coming to us because they are looking for our expertise from a science perspective as well, how to deal with COVID, how to make sure that their guests or customers can be protected as well. That's been a huge driver for many new customers to come to us.

It's also innovation. Doug mentioned our new sanitizing programs that we have that are killing COVID-19 in 30 seconds or less. Those are world records out there, and that's coming out of years of innovation as well.

And last but not least, in more difficult economic times, our customers like our proposition of driving the total cost of operations down, which drives more business as well towards us. So net-net, new business generation is kind of steady even versus what we had pre-COVID.

Yes. And I would just add because Christophe won't say it, he'll be humble today is from an operating standpoint, our businesses have done a great job performing in a tough environment and honestly, have dramatically outperformed competition in our ability to meet our customer needs. When it's required in unit, we get there. We've worked and leveraged remote digital capabilities, and this has really been led by Christophe and all of our teams out in the field, and that has made a big difference here as well.

Our next question comes from the line of Manav Patnaik with Barclays.

My first question was just around this increased focus on standardization that clearly, you guys are benefiting from, maybe a 2-part. The first one is, you talked about you can now do more capacity in hand care. But I was just curious if there was any updates on any other areas where maybe you still are restrained in terms of how much you can produce. And I think for the first time ever, I saw an Ecolab ad on TV for certified science, I guess. Is that trying to target a little bit more branding versus the Cloroxes and Lysols of the world?

Yes. I'll touch on the capacity question. Our capacity challenges really have been around hand care, in particular. To a lesser extent, to some surface sanitizes, it's all driven by demand. Meaning our hand sanitizer business is up 3x.

Now we've had to do a lot of work to be able to increase capacity 3x. And now we are expanding that beyond that because demand is greater than that. But these aren't easy, easy ramp-ups as you go through this, right? This is GMP. You've got to make this properly. We don't take shortcuts. We're not the guys using bad ingredients. People can count on us. And so we're going to do this the right way, so customers continue to count on us going forward. But the operations team has done really a terrific job working with the team to move these volumes up. And we have a lot of capacity now just coming online because it takes months to order the equipment. We found very creative ways to do this.

Regarding the TV, Ecolab Science Certified, let me give that to Christophe.

Thank you, Doug, and Manav, good to hear you. Ecolab Science Certified, so it's something kind of new for us. So we're learning as well as we go. Was really meant to support our customers to provide reassurance for their consumers, their guests, for the most part, so in hotels and in restaurants. And it's been really driven by the fact that we knew that guests were faithful about the risk of infection. We all know that. We knew as well at the same time that hospital-grade disinfectants were driving them. So 2 to 1x versus the retail brands that you mentioned as well before. So that was a plus clearly as well so for us.

And the third thing was really that we knew we heard from guests that they wanted to see clean, not just to have people telling them that it's safe out there. All that brought together this fear of being infected, the fact that you like hospital-grade disinfectants, the fact that you want to see that it's clean and safe led us to this concept of Ecolab Science Certified that has been extremely well welcomed by our customers. Their customers seem to be liking it a lot as well. So great reaction from customers. We're really working now in the rollout of all those thousands of sites as well, so around the gentry. And from a media perspective, it's just after a few weeks, so hard to tell, but early indication are way above average than what we had expected.

Okay. Got it. And it was nice to hear the comments on 2021 EPS, but maybe just on fourth quarter trends. I guess in terms of the way you described it, it sounds like fourth quarter won't -- even if there is a resurgence in cases, et cetera, it won't be as bad as the June quarter, but maybe somewhere between that and the September quarter that you just reported in terms of maybe partial lockdowns and impacts. Would you say that's a fair characterization?

Yes. I think Q4 is, one, you're entering Q4 with a very different run rate from a market consumption standpoint than we entered Q3. And so as a consequence, you've got a room. I mean to get to even equal, right, you can have some degradation through the quarter just fundamentally. We expected -- I mean some of these lockdowns are just being announced, but we knew that COVID second wave was real coming, and there's going to have to be some reactions to this. And so as a consequence, it's in our mindset.

Now it could get more severe than we anticipate and everything else. But we expect Q4 to be better than Q3 and the top line on income, on EPS on an absolute basis and on a relative basis versus prior year. I mean that's -- so -- and I think it's with our eyes wide open, but this is a wild world. And we're here to react to what we need to react to, and we'll do the smart things.

Long term, this business, I think, is in great shape. And we're going to manage intelligently. The one thing I'm not going to do is cut key investments in Q4 and do some other things because they are really what is paving the way for our very positive feelings about 2021 and beyond.

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

Your Institutional organic sales were down 28% year-over-year. What's your estimate of what the market was down? Maybe give us some perspective on the share gain.

Yes. It's not as easy as just doing the straight math simply because the market is down 50%. We're not going to be down 50%. There's just some base level of consumption in these units if they're just open. So the numbers that we have shared in the deck and others is over 90% of restaurants in the U.S. were opened by the end of third quarter, running at a roughly 55% capacity rate. Now in addition to that, they're doing a bunch of off-premise, but obviously, off-premise doesn't generate much warewashing business, as you might imagine, if you've been an off-premise customer.

So I would say, we certainly -- our volumes are healthier than the restaurant volumes in total. We do believe we're gaining share because we track very carefully what we're gaining and what we're losing. And I would say our losses have been minimal. And I mean, we've done a great job on the other side, securing a bunch of new business through this period.

And then water downstream sales were down 11%. Petrochemical was up, so refining was down more than 11%. I don't know if that is surprising or not. But I thought the utilities, the steam system and the cooling tower were relatively insensitive to the refinery operating rate. Or is that not the case?

Yes. I'll give this to Christophe. Our water businesses improved. You're talking downstream, and you're right, downstream was worse in Q3 than Q2.

Christophe, you want to...

That's right. Yes. Overall picture, Industrial is in a very solid shape as you've seen. So up modestly, and the OI is up double digit, as you have noticed, driven by a few great businesses, obviously, like water being one of them; food and beverage, really good; water improving very nicely.

On downstream, you underline petrochem, which is positive. This is really true. Otherwise, for the fuel refining business, we're kind of in line with the consumption, which was down 12% roughly in the quarter. But when the oil price is low, refiners have a tendency to go for like crude, which means that they need much less of our additives as well, which are usually used for harder to treat as well product. So generally, we like the petrochemical, which is where we focus most of our attention, especially going forward.

Out next question comes from the line of David Begleiter with Deutsche Bank.

Doug, you guys increased your savings this quarter to $335 million from, I think, $270 million. Where are those additional savings coming from? And with COVID impacts go well into '21, are you looking at additional temporary or interim cost levers to pull to offset these headwinds?

Yes, I'll have Dan answer specific questions around numbers. But yes, I would say a couple of things. What we wanted to do is allow time so that we could see more clearly where we are going to be hit, say, for several quarters, at least, or even a couple of years, like we've talked about lodging recovery and some other things. And we are starting to adjust our cost in businesses that are going to have more lingering effects.

You might think also, we are investing in some businesses like Healthcare and Life Sciences, where we expect the lingering impacts to be positive. And so we have increased A 2020, which was the program that we had in underway, which is really a place for us to put early moves there. They were not a big impact at all in Q3, will start impacting Q4 somewhat, but the major impacts will be in Q1 and Q2 of next year.

And Dan, if you want to add some detail.

Yes. Thanks. So just as you've indicated, right, we've announced that we've taken up the full year target from $270 million to $335 million. And of this incremental $65 million, as Doug has indicated, we anticipate that the big bulk of that, say, maybe $50 million, will fall into 2021, with a little bit recognized in 2020, not much, frankly, given the fact that we're -- you can imagine starting -- where we're starting now near the end of October and a little bit of cleanup in 2022.

In terms of what drives it, I mean, I would go back to sort of how we're thinking about A 2020 or this cost-savings initiative, generally, which is some of this is a reorganization. A lot of it, frankly, is driven by getting back benefit from the significant investment that we've made in Institutional. And as Doug has indicated, we're really similarly sitting here in the era of COVID, taking a look at our deployment principally and where we might see continuing benefit. And so of the $50 million, it's pretty evenly spread, frankly, across the Industrial business opportunities; in supply chain, too, where we true-up and had an opportunity to think of improving efficiency of some of the lines; and some also in the Institutional business, not surprisingly.

And Doug, just looking longer term, given the impact of COVID on Institutional, is this Institutional a fast-growing business post-COVID than it was pre-COVID?

Yes. I think there's going to be -- I mean Institutional is obviously ground zero for COVID, and there's going to be some knock-on effects for a period of time, but not forever, by any means. I would say, I think if you read most lodging forecast, people believe that business travel will be down for several years, but will start coming back. It will be replaced in fairly short order, but I think lodging takes a couple of years to recover. I think restaurants recover a lot quicker. And the reason for that is if you look at the history of recessions and everything else, even in restaurants that go out of business, there seems to be an endless line of people who think opening a restaurant is a great idea. And that has been true. And you end up with a lot of, let me just say, capital-light opportunities after these recessions. You have strip malls with restaurants in them that are vacant, where they are looking for somebody to move in and put a sign on the door and get back into business, and it's sort of a time-honored tradition.

So, so far, I would say, we've been surprised at the fact that there's not more restaurants out of business during this period. We expect that there will be more, particularly as we get into the winter, but it's still probably below the forecast that we had internally last March and April. So Institutional, ultimately, we feel very confident will be a -- and continue to be a great business.

Now we can get to earnings, right, growth faster than we'll probably get to sales record growth simply because we're doing a lot in the business. Some of this is planned pre-COVID, a lot of the technology moves we're doing, the efficiency moves. We've accelerated the deployment. I mentioned this in my opening comments of the newest and latest shield technology, which gives us a lot of new capabilities and makes our field team a lot more efficient and gives them much more time to sell. We are adjusting our field service team to what we expect to be service requirements going forward and efficiency benefits. But we're actually adding sales firepower because we're now coming through this, and out of this, we want to go out and secure the new business that's going to occur. There are other forecasts, let's say, in 2021, midsized chains and others will be adding a significant higher number of units than they've done in recent years as they work to capitalize on this, too. And we want to be the guys there getting this business.

We never mind taking, if you will, SG&A risks like this. We think they're wise. We think they're going to pay off and help us recover even faster. And if we're wrong, they're not hard to address.

The next question comes from the line of Gary Bisbee with Bank of America.

I guess if I could go back to the cost program for a second. Good to hear about the incremental and where that's coming from and the timing. But can you just give us an update on where you are versus the initial plan? As I recall, it was a significant number and growing number from '19 to '20 and then into '21. Are you on pace? Did you pull some forward given the challenges of this year? Or is there still an expectation that there's a significant step-up from the original plan next year before this $50 million incremental that you're adding here?

Yes. So this is Dan again. Let me -- I'll just walk through the sequence here. We announced a plan, right, which was originally $200 million and took it up to $325 million, so we accelerated it. Of that $325 million, $55 million was focused directly on the upstream business. And so those cost savings and all of the incurred expense associated it went with the ChampionX business. So that's how we net down to the $270 million. And frankly, we've described this $270 million as $200 million in run rate savings for Ecolab and then offsetting $70 million of what were essentially stranded costs related to the separation of the ChampionX business. So that's the background on the $270 million.

If you focus on the $270 million, I would say that our capture of that opportunity has been almost exactly in pace with what we have said, okay? And so now we're saying that we're going to increase it by $65 million for all of the reasons that I went through, with the biggest part of that benefiting and falling into 2021.

Got it. So there's -- I mean I have the $325 million breakdown, which you provided a few years ago. And so I understand part of that went away, but it was like $80 million in '19, $105 million in '20 and $140 million in '21 was the initial target. So assuming a lot that went away is in '21 maybe, but -- so there's a significant step-up still from the original plan, and then you're adding on top of that.

I would say yes. Okay. From the $200 million to the $270 million, that was the step-up. Really, though, I would think about that as an offset to the ChampionX-stranded costs.

What we disclosed as incrementally benefiting 2020 originally was $110 million. And it will be essentially that number with a little bit of increase related to the $65 million increase. So I view this as being -- once we expanded the plan for the first time, if you net down to the $270 million, which is ex the ChampionX piece, we have been pretty much in line with the targets year-by-year, as we've communicated them.

Yes, I'll only add this. What we said very early in this, and we were asked that we're going to make cost adjustments even back as early as February. We basically said, "Look, we're in the fog of war. We don't know what moves to make right now. We need this fog to clear and really have more understanding of where the opportunities are and where the challenges are going to be, what's going to linger and what's going to go away quickly." And as a consequence, we are sitting here today with much more clarity around what needs to happen moving forward. So we're much more confident taking steps that we don't believe are going to cause any unintended harm and other moves.

The team, I think, is in a great place. Everybody understands. And since we're adding in some businesses and subtracting and others, even where we're reducing our team, we have opportunities to create for them another businesses, which we're making available sort of differently than we've done in the past. So these are moves we're taking.

So in Institutional, we're certainly taking steps, which I mentioned, around field service costs, in particular, given number of units and the efficiencies that we have generated as a consequence of the technology investments and all the digital investments that we've been talking about over time. You would expect us to do those. And now we have a better understanding of delay of the land, and so we're taking those steps. And if anything, I would expect us to take more -- not -- this is not internal, that's all been discussed. But as we start getting clarity around the financials, what that means and what it means for 2021.

Our next question is in the line of Ryan Connors with Boenning and Scattergood.

I wanted to ask a question about -- you talked about the fog of war, Doug. One of the things that seems to be emerging from that is that the big chains are out there taking share, if you will, or faring better than some of the mom-and-pops restaurants, as an example, but I guess that's in a number of different industries. That would seem to favor a company like Ecolab that presumably is heavy with some of those big national accounts. Can you talk about that dynamic and whether you think that's meaningful, and how that affects you, if that does, in fact, continue in the next couple of few years?

Yes. I mean it could only be a net positive for us. How it exactly plays out in terms of their ability to continue to garner share vis-à-vis smaller players, we watch the same trend. I believe they will gain share during the upcoming periods, probably even more notably during recovery. They're poised to add units aggressively and would be in a position to do it even faster and, in some cases, in, say, smaller and mid-sized players. So I would say we're not -- it's hard for us to say exactly what this means to us. But I would say, to make a case it's a negative would be hard to make. It's net positive, for sure.

Got it. Okay. And then my other one was at risk of going across the valley as it were. You talked about investments in capacity, in hand care and sanitizers and the 3x demand growth and so forth. Obviously, you're not the only one making those capacity investments. And if, in fact, things normalize post-vaccine, even if that's a year or 2 or whatever out there, how do you guard against, really, as a company and as an industry adding too much capacity and then we've got a negative pricing cycle in those product lines once this all kind of -- the dust settles here?

Yes. I would say there's 2 things. One, here's our expectation in the hand care market. We think in the near term, it probably -- and this includes hand soap, which is obviously a much larger market than hand sanitizer in total, that the combined market triples and then settles as a double versus pre-COVID, i.e., there's certainly a COVID bubble here, but the post-COVID will be at a run rate much higher than the pre-COVID simply because you condition people through this around hand hygiene, which, by the way, is a smart thing to do to prevent many other viruses than just COVID-19.

So with that, yes, are people going out? Yes, we're not the only guys adding capacity. But I would say prior to this, we were also doing a lot of co-packing. So we are now in a place where we have additional capacity. If it proves not to be as wise, we can in-source stuff if we need to. So I think we've got a number of options here, and we wanted to create more options, if you would, going forward.

In terms of all -- how price war, it's not going to work that well here. Even hand care, dispensers fall off walls, things happen. We have been priced at a premium. In almost every one of our markets, we're the -- if not the global leader, right, #2 in the world in terms of hand care. And we do it at a significant premium because service does matter even in this market. So I don't think we're -- I don't think that's going to be the play or the conversation we're going to be having in 2 years.

Our next question comes from the line of Chris Parkinson with Crédit Suisse.

So you went on this a little bit, but I just want to get down a little bit further. But despite a lot of noise on the Institutional revenues right now, how should we be thinking about the current market share gain environment? It still seems, despite a lot of noise, like you're outperforming a lot of your peers. And then also, just when we think about the growth in innovation investments, how do those ultimately factor into your expectations for your framework for '21 and '22? So just any additional color would be greatly appreciated.

Yes. Well, I'll just put together what we've already said on the call in maybe a different context. One, we have confidence that the business is going to be playing above 2019 in total next year, right, from an earnings standpoint. We don't believe Institutional is going to be fully back while we're doing that, which we've also said. Institutional will ultimately have record sales and record earnings. We have not seen the peak of Institutional by any stretch because that market will come back. We think foodservice first, lodging a little later. The good news is foodservice is much larger, and there are underlying trends in foodservice, which are positive. We are gaining share, which means I think we'll even beat the market getting back.

So I guess, the point is, I think when you look out beyond the depths of COVID, you've got a number of positive earning machines, right, within this business. [Delivery] of Institutional over the couple of years; [slightly] faster recovery in Industrial and some of the other players; technology, lowering our cost to serve on a permanent basis, et cetera. So I -- we feel like the steps that -- the steps we've done in the last 6 months, I think, has long legs. That was the whole idea. We didn't want to go do a bunch of stuff in the second quarter that would only help the third quarter. We wanted our stuff to have years of benefit, not weeks of benefit. And I think that's why I'm proud of the team. You can get very flustered during these periods because these results are hard to report. It's not what we normally do. But I think the steps will prove to be very wise going forward. I don't think we're very far away from getting back to the type of reports people expect out of us.

Great. That's very helpful. And just very quickly on the Industrial front. There's been a fairly material divergence between end markets. Just versus your initial expectations, let's say, coming out of the second quarter, can you just assess your performance in F&B, water and downstream? And then similar to my questions on Institutional, how would you also view your own relative end-market performance on a go-forward basis?

Yes, I'll give this -- Christophe got this.

Chris, maybe starting with your Industrial question, and then I'll cover Institutional. So as mentioned, overall, Industrial is in a very solid shape, saw slightly off at sales, but income up 18%. And that's the advantage we have, that we have so many different end markets as well that we serve but all driven by these needs of water purity and hygiene, food safety as well, which are obviously some big trends right now.

So when we think in terms of the water businesses, the way we call them, so this one has improved very nicely. So from a minus 5% to a minus 2% in Q3, and we expect that to improve as well in the quarters to come.

F&B, which has been a very strong franchise pre-COVID has remained fairly strong positive, for sure, during COVID as well. Q3 being a little bit of an unusual quarter out of 2 reasons. One is the total shutdown of brewing in Latin America. They're not allowed to produce beer, basically, over there, and we have a huge business over there, extremely strong, extremely profitable as well, but that's going to come back. People are not going to stop drinking beer, obviously.

And dairy as well in the U.S., which is related to schools as such, but this is very temporary.

New business is really strong in F&B, good momentum, great relationship with customers. There's no one even close to us who can really bring the water and hygiene as mentioned before. So a very strong position on Industrial.

And in Institutional, a lot has been said. Obviously, before, I firmly believe that people are going to go back ultimately so to what we call out-of-home. As such, people are not going to start cooking from scratch in the long term. So these trends are going to be positive. At the same time, people are going to look for more demonstrated safety in restaurants and in hotels. This is well to our advantage. They're going to look as well for more expertise. This is Ecolab's strength as well. They will want to have global standards as well that you have in every unit anywhere around the country or the world. Well, this is what we offer to customers.

And last but not least as well as such, well, it's mostly driven by corporate accounts, as Ryan was asking before, 2/3 of our business are large customers, well, that's where the growth is going to come from, and that's where we have most of our focus. So Institution long term is going to be a positive story as well. So I hope it helps, Chris.

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

So looking at the other segment, it seems like it's mostly going to be driven by pest. The profitability surged pretty dramatically compared to kind of the revenues where, look, they were up but not nearly to this degree. Was there a bit of a catch-up in there? Or I guess, can you help to explain kind of the incremental margins from 2Q to 3Q in that business and help us to think about how to think about that business going forward?

I would say within their pest, our pest business, I would say, recovered even stronger than we had thought it would during the third quarter. It was down 2% year-on-year in the third quarter. And they made up a lot of ground. They have done a number of smart things in that business and are poised to break through the growth number even in the fourth quarter. So of those businesses, it's probably the most significant in terms of its ability to earn money. And most of the -- that's probably the biggest positive story coming out of the other segment.

Got it. And then maybe just a housekeeping question just because admittedly, I've gotten probably a dozen e-mails on this since you've been talking. But -- so when you talk about EPS growth in 2021 versus 2019, I assume that's on the $5.12 base, the kind of pro forma, the oilfield services split base. Is that right? Am I thinking about that right?

Yes. That would be our new -- that would be the '19 number we would compare to.

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

Just thinking about trying to bridge Institutional a bit more, and I'm looking at that Slide 4 you've provided in the supplemental data. And in particular, just trying to think about the multiplier effect of product use in COVID and what percentage of operating rates in full-service restaurants do we need to get back to in order to kind of make it whole with 2019 because presumably, you don't have to get back to 100% or 90% or something like that, just given more products being used. And likewise, for lodging. So any thoughts there would be helpful.

Well, we don't have a specific number to throw out. It would be less than 100%. I think the truth of the matter is, you're -- there's going to be this natural, I would say, recovery ceiling until you have vaccine. Now what we believe is vaccines will be approved here in short order, but they're first going to go to frontline workers, second to populations at greatest risk and then broader populations beyond that. And you need a significant number of the population to get it. It's going to take quarters, right, to get this out.

And the reason I bring this up is I really think we will continue to see improvement in Institutional. Some on the top and then on the bottom line as we go through this. I don't know that you're going to be breaking through 90% than others until you get real breakthrough on COVID, to be honest.

We've watched in other markets. There's just a fundamental fear factor that stops people from going in the environment even when there's low COVID rate. Now it improves. It's got, clearly, room from this 55% number. But I don't think it buzzed through 80% until you start seeing COVID done. With that said, we don't expect Institutional to be fully back in '21, but we expect to be certainly playing north of '19 EPS in '21.

And just as a follow-up, just thinking about the SG&A line into next year. You're down about $165 million year-to-date, and I'm just trying to reconcile. You have some discretionary cost savings that maybe some of that starts to come back later next year versus the cost program that you're running to take things out. So how should we be thinking about SG&A trending into the fourth quarter? And then how much do you think it can actually stay down next year?

Yes. I think the discretionary savings, i.e., T&E, in particular and some others, I think lasts well into next year. Our view -- we're going to respond to what actually happens on COVID, not what we believe. We believe COVID's here through a good part of 2021. If that proves to be wrong and it goes away faster, then that will benefit and vice versa. But our travel isn't going to change dramatically until COVID restrictions change. And so there's sort of what I will call natural benefit lined up with sales pressure.

So we think for the majority, certainly, majority next year, we're going to see depressed T&E travel as a consequence. We will not bring it back up to 100% of 2019 rates for a long period of time because I think we've all learned. There probably are a number of trips we took in the past that we didn't need to take, and we will be using digital technology. In many cases, that prior we took trips to accomplish. So travel is not going down to 0, but it's not going back to 100% in '19 either.

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

With regard to Healthcare and Life Sciences, that growth rate certainly is impressive. How sustainable do you think that is? And then the margin in the segment was very strong. Just curious, how much was pricing and other factors for the margin expansion and maybe some discussion on sustainability of that?

Yes. I'll give it to Christophe.

Thank you, Doug. Scott, so it's been another great quarter for this group. So 29% top line growth, 82% income. And it's been driven by both big businesses in there. So Healthcare and Life Science, both were in the double-digit top line growth and income growth as well, driven from one part because of COVID. On the other hand, as well, a lot of government business as well that we could conclude as well in Germany, in the U.K., in Australia because of the expertise that we could provide as well, so to those agencies with whom we have great relationship. That's going to partly stay in the future, but it's going to ease as well over time, whenever COVID is going to ease as well. So that's back to Doug's comment of the vaccine and how many quarters we'll have to wait for that.

Bottom line, when we think in terms of underlying growth, we've said so for Healthcare that if you exclude those big onetimers, it's roughly 12% top line, but that's still driven by the COVID wave as well. So when that eases as well, we believe that we will be so in healthcare. So kind of 6% to 8% underlying growth, which is really where we always wanted to be. So ultimately, that's a business that has truly benefited from what's happening here.

And on life science, it's a business that's totally on fire. It's really an industry that loves what we do for them. New business is extremely strong. Innovation is very strong as well, think Bioquell as well, so has grown 100% during the quarter as well in Q3, while those are offerings that are going to stay as well going forward. So it's not going to stay at the same high level as what you've seen in Q3, but it's going to be double digit underlying so going forward, for sure.

Appreciate that, Christophe. And as a follow-up for either you or Doug. Just curious, now that you've built out capacity significantly for human sanitizing, just curious kind of on the back end of supply chain, what were the considerations you made so that if we get into a situation where the world has largely sit down -- shut down, hopefully, that doesn't happen again, but has this been done largely domestically, near shore? Just curious of the thought process and the strategies you've taken in developing that supply chain.

Yes. Our historic supply chain strategy is to make in the currencies we sell-in, i.e., if you go to China, we have multiple manufacturing facilities. They're really designed to meet China demand. And like 93% of our China volume is produced in China. So that's been the historic strategy, and it's the strategy that governs us going forward. It was really designed because we didn't want currency to become a strategic problem, i.e., producing U.S. dollar gets strong and our competitiveness has weakened everywhere else. That was the initial reason for it. It obviously has also proven to be a good strategy in a tariff world and a more restricted supply world. So that strategy has been, let's say, cemented at this point in time is a good idea.

So where we are building, we're building a lot of the capacity in the U.S. and in Europe, which are 2 of the largest markets where you'd expect, but we also made capacity moves in China, too.

Our next question comes from the line of Laurence Alexander with Jefferies.

Two quick questions. The cost reduction moves that you're now making, how will that affect operating leverage once conditions recover? And secondly, a longer-term question, I guess, I remember most of our discussions on the Healthcare side being around antimicrobials. Can you speak a little bit about your (inaudible) in antifungals?

Sorry right, Laurence, the last couple of words got garbled. What was the last question about health care antimicrobial?

Sorry, can you speak about your capabilities in antifungals as opposed to antimicrobials?

Yes. Well, in Healthcare, I mean, if you want to go -- I mean spores are the biggest challenge, right, C. diff and the others, and we have significant advantages in that category in Healthcare as well. And so that's been an area that I would say we have some standout capabilities, too.

The health care capabilities are important, not just because of the Healthcare market opportunity, but also because of, if you will, what we learn in Healthcare and how we can apply it in other businesses. So Christophe talked about the positioning that we're using in Ecolab Science Certified, which is health care-grade, hospital-grade disinfectants that resonates with consumers. Oh, by the way, they're right because the breadth of the kill claims and the kill time are much more advanced in those types of products than they are in consumer products. You can have a consumer product that literally takes 4 minutes to kill what we're killing in 30 seconds. And the problem is not many people wait 4 minutes for anything anymore. So this is an important part of what we're doing.

The leverage question, I mean, we don't have a specific answer. I mean as we get out and articulate the complete program, it will be pretty obvious what the leverage impact will be. But certainly, it's going to improve leverage, which I know you already know.

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

Doug, you mentioned this reduction in on-premise dining. A lot of your restaurant customers are shifting toward more takeout and deliveries. Some are coming up with these novel ideas like ghost kitchens or creating meal kits to help make ends meet or survive in this challenging time. What kind of changes are you making in your approach to help your customers navigate this trend toward less on-premise dining? And how do we think about kind of the future of your business, what we used to think of as warewashing being kind of the anchor or the cornerstone of your Institutional business? Is that going to be shifting toward hard surface cleaners going forward?

Yes. I would say 2 things. I mean there are certainly new business categories in Institutional that we are pushing and exploring that, frankly, we think will have staying power, no matter which way the industry goes. With that said, I would say, we think post-COVID, the industry reverts back to principally on-premise for 2 reasons: it's what diners want mostly; and two, the profit of takeout, given packaging and other, is not great. If you're in the pizza business, it's hard not to make money on pizza because the ingredient cost is so low and all you got is a cardboard box. But when you're getting into -- let me just say some of these fancier meals and the packaging costs and the rest, I have a number of friends who are actually in the restaurant business, it is not a perfect solution for them. They're trying to keep the doors open, cash flow moving and everything else, but their preference greatly would be to be serving these meals on-premise versus off.

We have supported ghost kitchens. They've been long-standing in a number of ways. Think about food trucks and the rest. They are going to have a place going forward, and it's probably the way to run just the delivery business. But there will be modifications in this industry as a consequence of COVID, but I don't think it's a revolution.

All right. And then in terms of the food retail side, you mentioned expanded cleaning protocols and frequency. Can you give us a sense of how much that's increasing sales right now? Like is the typical grocery store customer, for example, using 10% or 20% more of your product? Or is it double how much they would typically be using?

Well, I think it's settling down where it's double-digit up in consumption. It's -- I will also say you've seen slowly a number of retailers curtail some of the cleaning that they were doing early. It's still up versus where they were pre-COVID, but where you had maybe 4 people wiping down every cart, you may have 1 or you have cart wipes and some other things, all of which go to consumption. We expected this. So I think what you'll see, you'll see certain categories have benefit going forward. But right now in the Institutional business, I mean, the #1 volume standout is the negative impact on warewashing, which, by the way, is where we have a lot of our innovation and money, it will come back. But until it does, right, you got a mix challenge in Institutional that doesn't get fixed until digits start getting washed.

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

Doug, it's Eric Petrie on for P.J. Can you talk a little bit more about your growth opportunity in these new fast-kill cleaners? And how long does it take to reach peak sales in your view? And then as these viruses mutate, can you talk about how effective the cleaner is over the long term and whether or not you'll reformulate?

Yes. I'll turn it to Christophe on this. They have quite a bit of staying power as you go through, and there's different ways you kill organisms. And I would say, for instance, hand sanitizer to alcohol basically destroys the cell. So it's hard to develop immunity to a spear, if you think about it that way. Some do poison, and you can have immunity built over time to poisons, but not to everyone, and it's not a fast issue, i.e., we're using quats that still have effectiveness that have been around for decades, right, in a number of instances.

So it's not a short life in terms of our business careers. It's a short life in terms of human history. So I don't know if you want to add in terms of, Christophe, how long it takes to get to peak sales, et cetera.

The only thing I would offer is that we're really watching every pathogens out there, so the ones that we know well and how do they react. So against our products as well or how do our products are effective against those, the new ones as well, COVID being one of those that we didn't know, obviously, in the past, and we learn from each other. The latest disinfectant that we talked about today, which is extremely fast skill time, was developed for the norovirus, for instance. So we really look at all pathogens out there to try to understand the type of effectiveness, how is it still working, is there any reaction to it as well. And generally, so we develop our innovation in order to stay ahead of that. So I believe that we are in a very unique place, especially compared to any competitor out there.

Helpful. And then, all right, just maybe talk, Christophe, on peak sales related to that question. And then for my follow-up to Doug, as end markets recover, some managements have been talking about building out their M&A pipeline or returning to share repurchases. So Ecolab's net leverage has improved to below 2s. Can you discuss both uses of cash?

Okay. So I'll take the first question, and I'll give the M&A part to Dan just in a second. To your point, on the peak annual sales, we usually -- it takes 5 years, which is the best average that we have out there. Some products are sometimes shorter term, but most of them are longer than 5 years. So that's why it's the metric that we use.

On M&A, Dan?

Yes. So I'll interpret it more as a cash priorities question. You also asked the question on share repurchase. So let me just say this. We ended the quarter with a little north of $1 billion on the balance sheet in cash, which is, by any historical standard, a very, very big number for us. So yes, that's the premise for the question, right?

I will follow the thread of a lot of the Q&A today to just say that the world remains a very uncertain place. And I'm comfortable with the amount of cash that we have on the balance sheet. Partly, this is a cash-is-king environment, and there's a lot of who knows what's to be seen. We are getting increasing confidence, as you've heard from the tone of the call today, too, about the shape of the world with many uncertainties yet to be known. I presume that as we go forward, it will present both challenges, right maybe some unforeseen, but also opportunities.

And so I guess, the shortest answer I can provide is that as our confidence continues to build, you'll see us return to more traditional cash levels and cash priorities, including share repurchase and M&A activities, okay? So.

Thank next question is from the line of Jeff Zekauskas with JPMorgan.

Revenues declined $250 million in the Institutional business, and Institutional operating profits were down $200 million. Why is the decremental margin 80%? If the decremental margin were 50%, you would have earned double. What is it about the business where the incremental returns are so high?

You're talking about year-on-year on third quarter to third quarter?

Yes. Exactly right.

Yes. Well, I would say a couple of things. They won't be 80% over any long period of time as you go through this. But you get into quarters, now you're getting to what happened in the last period. You get into bonuses. Bonuses were -- are taken down and up in different quarters, in different years for different reasons, and these can have impact as you go forward. There are other investments or bad debt and some other things as you go through this period. But our decremental margins, either going down or going up over a period of time, aren't going to be in the 80% range. The gross profit of that business is right in the mid-60s, right, on a good day. So a lot of that's going to happen. We are starting to take decisions on fixed costs and other things. And so what we will see is a recovery of those margins as we go forward.

Were raw materials down about 5% year-over-year in the quarter?

Raw materials in total were not a material impact. If anything, they were negative in Institutional. A lot of that is stuff you're seeing around heightened demand in hand care and some other areas where you really just have shortage of supply. And Industrial year-on-year, minorly favorable.

At this time, we've reached the end of our question-and-answer session. And I'll turn the floor back to Mr. Monahan for closing remarks.

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

Thank you to those who joined us today. This concludes our conference call. You may disconnect your lines at this time, and we thank you for your participation.