Ecolab Inc.
Q4 2020 Earnings Call Transcript

Published: 16 Feb 2021

[Operator:]

Greetings, and welcome to the Ecolab Fourth Quarter 2020 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Monahan, Senior Vice President, External Relations. Mr. Monahan, you may begin.

[Mike Monahan:]

Thank you. Hello, everyone, and welcome to Ecolab’s Fourth Quarter Conference Call. With me today are Christophe Beck, Ecolab’s CEO; and Dan Schmechel our CFO. A discussion of our results along with our earnings release and the slides referencing the quarter’s results 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 Form 10-Q for the period ended September 20, 2020, September 30, 2020, 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, fourth quarter earnings continued to show sequential improvement despite the negative impact of a greater-than-expected second COVID wave. As earnings per share decline narrowed once again, as we leveraged our new business wins, increased customer penetration and digital technology, along with lower costs to show the sequentially better results. As before, roughly 80% of our aggregated business showed good sales and strong income growth. Our Institutional Division, which is roughly 20% of our current sales, remained the most impacted, reflecting the effects of COVID-driven restrictions on global restaurants and hotels. But we also note that Institutional is the business that could benefit the most over the coming years as long-term hygiene standards continue to rise. In 2020, we took a number of actions and made targeted investments for post-COVID success. We believe we emerged from 2020 better positioned as our business wins, new product development, digital platforms and our improved field sales force effectiveness should lead to a more effective and profitable Ecolab business. Looking ahead, we expect global efforts to reduce COVID spread, and the expanded rollout of vaccines will lead to further global economic improvement in 2021. We believe our strengthened business will deliver full-year 2021 earnings above 2019 results from continuing operations. For the first quarter, year-on-year percentage decline, showing modest sequential improvement from the fourth quarter, and the remaining quarters of 2021 showing strong year-on-year growth.

[Christophe Beck:]

Thank you so much, Mike, and good afternoon, everyone. It’s a pleasure for me to lead my first quarterly conference call as CEO to share with you our results and our expectations for the future. It’s no understatement to say that these are exciting times to lead this great company when what we do and, most importantly, the way we do it, matters more than ever. Ecolab is an exceptional company based on solid foundations and strong values. I’ve had the chance to be part of shaping where we are today and where we’re going tomorrow, so do not expect any sharp turns, as I will keep building on what’s made us strong, resilient, predictable and successful. The challenges the world’s facing today are ultimately also long-term opportunities for Ecolab and I believe that the best is still yet to come. So I look forward to sharing with you our progress and ambition in this and in other forums. And on to our results. Our performance continued to improve in the fourth quarter, in spite of the short-term reversal of global market trends and like what we and most actually sold coming out of the third quarter Earnings Call. COVID cases went up, lockdowns expanded and restrictions got tighter in most places. For instance, right after our Q3 call, Germany moved from 40% of restaurants being closed to 100% and a third of the U.S. states tightened restrictions. Nonetheless, our adjusted EPS continued to improve and narrow its decline, decreasing 16% in Q4 versus the minus 24 in Q3. We could have easily delivered more in Q4, but we decided instead to keep increasing our growth investments in innovation, digital technology, health capabilities and backbone infrastructure in the quarter to be ready for the rebound and the opportunities post-COVID.

[Mike Monahan:]

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

[Operator:]

Thank you. And our first question will be coming from the line of Tim Mulrooney with William Blair. Please proceed with your questions.

[Tim Mulrooney:]

I really only have one question, one thing that I want to talk about, which is this. You mentioned improvements in your Field Services organization implemented over the last 18 months. I think that’s part of your Institutional advancement program. And I’m not asking you to give away any competitive secrets here, but can you talk about what those improvements were? Specifically, I think you mentioned improving sales firepower, which should drive both new unit sales and market share gains. Thank you.

[Christophe Beck:]

Would love to. Thank you, Tim. Great question. So as you mentioned and as mentioned in my intro as well, those are developments that we had started a few years ago. And we’ve made those developments as well by working together with our field teams and our technology partners as well.

[Tim Mulrooney:]

Thank you.

[Operator:]

Our next question is from the line of Manav Patnaik with Barclays. Please proceed with your question.

[Manav Patnaik:]

Thank you. I had a question on around breakout areas, seeing how Life Sciences has become a very nice growth area for you guys. I think at your last Investor Day you talked about several new ones, and I was just wondering if you could give us some color there and if anything else has popped up either during the past year clearly.

[Christophe Beck:]

Hey. Thank you, Manav. Well, expanding our TAM has also been a part of the Ecolab strategy. So finding new growth avenues, new growth markets, and lining up resources behind them has been part of the way the company has been growing.

[Manav Patnaik:]

Got it. That’s helpful. And I was hoping you could just help us with the cadence of costs and maybe margins for the first part of the year at least with respect to the rising cost of your raw materials, please.

[Christophe Beck:]

Manav, just to make sure that I understand that you mean 2021 here, or 2020?

[Manav Patnaik:]

Well, 2021, just with the recent increase in all the raws, and how should we think about how that flows through your numbers?

[Christophe Beck:]

Yeah, so margins have been improving so over time in our businesses, so for a very long time. That was the case as well. So in 2020 since the low in Q2, obviously we see that continuing in the quarters to come in 2021, keeping really in mind that we see the year 2021 in two parts. There will be the first quarter, which will be very similar to what we’ve experienced in Q4, and then there will be the reopening of the end markets in Q2 and then the clear ramp ups in Q3 and Q4. So, it’s kind of slightly better in Q2 and as of – in Q1 sorry – and as of Q2, you will see a rebound as well there. We have good pricing power which is good. We have raw materials that are expected to be benign right now, but the indications that we see in the last few days/weeks ultimately saw going up in terms of raw materials. So we’ll have to mitigate that. But this is something that we’ve been doing very well for many situations similar that we’ve experienced in the past few years.

[Operator:]

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

[John Roberts:]

Thanks, and congrats on ranking near the top of the Barron’s sustainability list last weekend.

[Christophe Beck:]

Thank you, John.

[John Roberts:]

A few vacation locations have actually seen pretty solid hotel occupancy and restaurant traffic; not a lot but some have. And do you have any data to show in those specific areas that the overall cleaning product revenue per room or revenue per diner has structurally increased since the pre-pandemic levels?

[Christophe Beck:]

Yeah, I don’t have detailed numbers to share with you, but it’s very clear that in the spaces where it’s reopened, the one you mentioned, for instance, we’ve helped those customers with more solutions in order to prevent the risk of infection. That leads to better sales than what we had before. But to your point as well, so those are individual areas like vacation groups that you described. Unfortunately, so those are just selective ones, but those are good indications at the moment that the overall market is going to reopen. That’s – hopefully or that’s the way we expect it so in the second quarter, it will compound, obviously, so our growth opportunities in those units that we either used to have or didn’t have yet but will have more solutions as well to them.

[John Roberts:]

Gotcha.

[Operator:]

Thank you. Our next question is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.

[David Begleiter:]

Thank you. Christophe, Industrial had a very strong quarter and full year. So looking at Industrial in 2021, can that segment expand margins? And how much of a headwind will these discretionary costs be as they come back into the numbers in 2021?

[Christophe Beck:]

Yeah, so Industrial will keep developing its margins. It’s been the case, as you’ve noted, in 2020. In 2021, we’re expecting as well pricing to remain kind of at the similar level than what we’ve seen. The raw materials are going to be probably a bigger headwind than what we had in 2020. So net-net, margins will be similar but operating income will keep growing.

[David Begleiter:]

Very good. And, Dan, just on the cash flow, any thoughts or comments on working capital and CapEx in 2021?

[Christophe Beck:]

Dan, you want to answer this one?

[Dan Schmechel:]

Sure. Thank you. Well, maybe to ground us and the very strong performance that we had in 2020, first of all, working capital was a net contributor to strong cash flow because although we saw a little deterioration in collections and an increase in inventory on hand from a day’s perspective, the very favorable to cash flow at least impact of declining volumes made working capital a net contributor. So 2021 will be somewhat the opposite of that, meaning as the business continues to rebound, we’ll invest more in receivables and in inventory. So not significantly but we’ll invest in working capital in 2021. Having said that, we’ll remain very focused on collections. And I’ve said before in earlier calls we are very determined and have been sure to be paid for the value that we’re creating for customers. And frankly, on the inventory side, just a personal comment, almost, my expectation – and I know Christophe shares this sort of vibrantly – is that our goal on inventory in 2021 is to make sure that we’re building the right stuff for the right customers in expectation of the rebound. And so the favorable inventory in 2020 will reverse in 2021, but it won’t be a big drag on overall cash flow performance.

[Operator:]

Thank you. Our next question is coming from the line of Gary Bisbee with Bank of America. Please proceed with your question.

[Gary Bisbee:]

Hey, guys. Good afternoon. I guess the first question just going back to the Institutional initiatives here, can you provide a little more detail? Because what I’m really trying to get at is how much of it is about rightsizing costs versus other changes that would promote growth? Certainly the – your prepared remarks talk about spend to deliver this and cost savings after the fact, so part of it clearly is cost driven. But what you discussed earlier was much more I think on the growth, positioning for growth end of it. Just a little more color. Thank you.

[Christophe Beck:]

Yeah, thank you, Gary. It’s not cost-driven. What we’re doing in Institutional is part of what we’ve been doing for years. It’s driven by two things. As I mentioned earlier, the first one is really so to increase our sales firepower, we always want to have more dedicated people towards selling new customers, selling new solutions to existing customers. We’ve shared earlier as well our ambitions to increase penetration by 20% as well over time. While we need to increase as well our sales firepower, which means people and hours behind that in order to deliver it. Technology is obviously helping as well so for that. On the other side, on the service, it’s to improve the customer experience. That when one of our service rep is going to one of the customers while she or he doesn’t spend a lot of time collecting data or getting papers together, she or he can really get in and has all the information and can really work immediately with the customer or the customer issues that they might have as well. And as mentioned before, so if their day is organized better, if we can really route them in a way that minimizes hours and mileage, at the end of the day they can service more customers, spending more time with the customer instead of internal initiative stuff or fixing equipment that we have. And if that works, well, it’s good for the customers and it’s good for us. In other words, we have more sales firepower, we have improved operational efficiency in service, which nets to an improvement of cost structure as well at the same time.

[Gary Bisbee:]

Okay. That’s helpful. And then the follow up, can you help us think or discuss how you’re sort of thinking through volumes you’ve earned in areas that have benefited from the pandemic? So whether that’s sanitizers or disinfectant s or other, how those could persist versus maybe moderate at some point in the future? And I guess as part of it, are you signing new long-term contracts for these things with a volume expectation? Or is there the risk that a lot of the incremental revenue could go away at some point in the future when the pandemic is in the rearview mirror? Thank you.

[Christophe Beck:]

Yes. Long term, we always have contracts with the vast if not all of our customers around the world. That’s part of our business model and it will remain as such as well going forward. And we have plans of usually so to increase as well the demand with all of them. That’s why we invest as well so behind all those customers. So, to Mike’s point before, 80% of our aggregated business has been growing in 2020. Well, those businesses will keep growing as well in 2021. When you think about it, 80% have been growing, so 5% top line in 2020 and 14% operating income. Well, they’re going to keep growing as well so in 2021. The mix is going to be a little bit different as mentioned, so in Life Sciences the demand was higher for natural reasons. In health care, we got those national government deals as well. But underneath you still have this 5%, 6% growth which is good. Industrial is going to move towards positive growth as well. And sanitizing products, they’re going to stay at the fairly high rate of growth. It’s not going to be the same as in 2020 because I don’t expect people so to sanitize their hands the same way as they did during COVID. That would be too nice. But it’s going to be more than what they did before COVID’s peak in 2019. So overall, I think that the trends are going to be similar or better for most of those products.

[Gary Bisbee:]

Thank you.

[Operator:]

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

[Rosemary Morbelli:]

Thank you. Good afternoon, everyone.

[Christophe Beck:]

Good afternoon, Rosemary.

[Rosemary Morbelli:]

So just going back to the demand, the high demand in Life Sciences and health care, do you have the feeling that there may be some inventory build in some of the channels and actually you could see a decline in revenues for full-year 2021?

[Christophe Beck:]

I don’t think so, Rosemary. So Life Sciences is kind of a direct business, so there is no in-between distribution, and it’s mostly bulk product, as well, that you can’t really store as such. So inventory is quite much so just in time in Life Science, and it’s been growing strong in 2020. It’s been growing strong before that as well, and we’re planning for great growth as well in 2021. So Life Science is going to be the continuation of a great story. But we need to keep in mind as well that, well, they had an exceptional year in 2020, so the comparisons that we will make in 2021 will look a little bit softer. That’s why it’s going to be important to look at the underlying growth, which is the way we run the business anyway. And it’s even more true for health care because the growth of 20% plus that we had in the last quarter was partly driven as well by those national deals that we’ve made. So for some of the governments, in order to fight COVID, underlying it’s going to be 5%, 6%. That’s the way we measure it. So when you do the comparison, Rosemary, 2021 versus 2020, it will look like a much lower growth, but it’s just because the comparison is kind of unfair. But we will look at the underlying growth, which is ultimately what’s going to be long-term, and we expect it to be within the range of 5%, 6% for health care.

[Rosemary Morbelli:]

Okay. Thanks. That’s helpful. And then, Christophe, if we look at 2021, you expect that your results will approach those of 2019. So do you expect this to be the case for all segments? And both for revenues and operating income?

[Christophe Beck:]

So the 80% that we’ve talked about with health care, Life Science, Industrial, well, they’re going to be ahead of 2019 because they’ve been ahead in 2020 versus 2019 and they’re going to be ahead of 2020 in 2021. They’re going to keep improving, obviously. Whereas Institutional is the one that needs to grow from a much lower level started in Q2 2020. You’ve seen it’s in Q3 an improvement, Q4 not so much. Q1 is going to be the same, and Q2 is going to continue afterwards. But at the same time, we need to keep in mind as well that we have investment in the business that we’re going to make in 2021, as we did in 2020, and I’m going to keep increasing those investments as well. The mix is going to be unfavorable, so in 2021 versus 2019, just because Institutional is going to be lower because it’s going to be recovering towards the end of the year. And the last point is that we have some cost rebuild. People are going to start traveling and entertaining again. We’ll have merit as well, so coming in there, so it’s going to be a different story in most businesses. But ultimately, we feel confident that 2021 can deliver earnings that are adjusted ahead of 2019.

[Operator:]

Our next question is coming from the line of Chris Parkinson with Credit Suisse. Please proceed with your questions.

[Chris Parkinson:]

Great. Thank you. Despite a fairly choppy 4Q, 1Q, which I think is overwhelmingly expected, there were some delights that you highlighted across your supplemental. When speaking to your teams, can you speak to maybe two or three end markets for which you’re now incrementally more confident or constructive, just given pent-up demand once the world truly opens back up? If you can hit on that and just any potential comments on preliminary share gains would be greatly appreciated. Thank you.

[Christophe Beck:]

So just to make sure, Chris, that I understood the question right. So the end markets that we would estimate would be rebounding so during 2021?

[Chris Parkinson:]

Yes. And any comments around market share. Thank you very much.

[Christophe Beck:]

Okay. So the biggest one is obviously so Institutional, so restaurants and hotels. And the way we measure performance in this down-market today is how many units do we have compared to the low point in Q2, and how many solutions do we sell to existing units as well. It’s really so to make sure that we improve our base the moment it reopens that we can accelerate. And in institutional, we have more opportunities, much more than we had in the second quarter last year. We have much more solutions as well. So the moment the demand is coming back, that’s going to compound, which is really good news. And we expect that not to happen in the first quarter, but it’s going to happen sometime in the second quarter. Another one is downstream, which is related so to the oil and gas demand. When cars are going to be used more, when planes are going to be flying more, when boats are going to be more traveling as well, like cruise ships obviously. So the demand for oil and gas is going to accelerate. So our objective here is the same as what we did in institutional; more refineries and more solutions to those refineries, and that looks quite good as we speak right now. So those are two big ones that are expecting so to rebound in the second quarter. All the other businesses, major businesses, Chris, are ultimately on a good path, no matter what.

[Operator:]

Thank you. The next question is from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.

[Vincent Andrews:]

Thank you. And good afternoon, everyone. I wanted just to follow up on the new business wins, maybe in particular in Institutional, but you could touch on the other segments as well. So I guess what I’m wondering is that there was a clear opportunity as COVID hit to go get new business, and I’m just wondering if there’s sort of a second phase of new business opportunities that it’ll be unique to COVID, but it’ll come more during the reopening as maybe customers come to a realization that they want to change providers or trade up or what have you. How do you see that playing out?

[Christophe Beck:]

That’s a great question. Well, starting first with the net new business in 2020 has been quite ahead of 2019, which, honestly, personally, I didn’t expect that we would be that good. But we’ve managed so in 2020 to sell more new business than we sold in 2019. And to your point in Institutional, that’s been the best new business generation that we’ve had across the company. So Institutional has done an exceptional job in terms of new business for two reasons. Namely one is obviously for the focus of our team on new business during that time. But the second is the one that you touched just before that during those difficult times of COVID, customers were looking for expertise, for scientific expertise. They didn’t know what COVID was to begin with; how to address that issue; how to get ready for the reopening; how to get ready for the future as well. And we are the unique company that could provide that support to them in the U.S. like anywhere as well around the world. So many came to us as well so during that time. And the last point I’ll mention is also our capability to supply as well. So especially in sanitizing products, growth has been outstripping the supply so quite a bit. We’ve built a lot of capacity as well so during that time, while this is capacity that customers have been asking and that we’ve been able as well to sell to them. So good new business in all businesses, actually, for the whole company; and I mean especially in Institutional. And I think that that’s going to be even more true in 2021 because we’ve demonstrated to our customers that we’re here for them when they truly need us.

[Vincent Andrews:]

Okay. And, Dan, if I could ask you a quick question on the balance sheet. Just seeing that the post-retirement health care pension benefits was up, it looks like $140 million year over year. Is that a function of discount rate assumptions? Or return on plan assets? Or what happened there?

[Dan Schmechel:]

Yeah, really, the year-on-year change is discount-rate driven. Okay. Likewise, to this other income line that you see down below operating income. So rates have such a big impact both on the liability and on the accrued expense. Okay.

[Operator:]

Thank you. Your next question is from the line of John McNulty with BMO Capital Markets. Please proceed with your question.

[John McNulty:]

Yeah, thanks for taking my question. So the push on the ESG front, especially from Industrial customers and players out there, seems bigger than I think most of us would have thought a few years ago. And I guess with that in mind, like when you think about the water platform that you have and especially on the Industrial side, can you speak to the level of engagements that you’re having? And is it higher than what you would have thought say a couple years ago when you guys gave the longer-term outlook for the business of 6% to 8%? Like I guess have we reached a tipping point where we may see multiple years where that business accelerates at a level that is maybe faster than what we’ve seen or what you may have expected? How should we be thinking about that?

[Christophe Beck:]

It’s definitely bigger than what we thought, and honestly, I thought that during COVID that would really take a back seat. And none of that happened, thankfully, actually so for the world in general and especially so for our business as well. We’ve had always more customers coming to us for two reasons interestingly enough. On one hand saying well, can you help us get towards our ambition in terms of ESG in terms of water usage, in terms of climate, so CO2 emissions, waste that we generate as well? And there was a second dimension which was an interesting new one for us. Many customers coming to us and saying, well, you guys as a company have done so well from an ESG perspective. Is there something we can learn from you that we could implement as well so within our own company? And I can give you two examples in near on one hand, the larger consumer goods company out of Europe with whom we’ve been working for a few years, towards the end of last year said we need you to help us build a plan to become water positive by 2030. Well, those are new questions which we know how to answer that. No one else can. And on the other hand, so you’ve seen Microsoft as well announcing their ambition to be water positive by 2030. We’ve done that plan. So together with them, we are helping them getting there as well. So those are examples that are true of many of those companies so coming to us. So, yes, there’s an inflection point that’s turning bigger, better than what I would have thought.

[John McNulty:]

Got it. Thanks very much for the color.

[Operator:]

The next question is from the line of Justin Hauke with Robert W. Baird. Please proceed with your questions.

[Justin Hauke:]

Hi. Thank you. So I just wanted to ask some questions on the restructuring program, just because it’s changed a couple of times and it’s somewhat difficult to track where you are. Relative to the $355 million in total spend that you’re talking about now through 2023, what’s been spent under those programs as of the end of 2020? And then similarly for the benefits, the $365 million of annual savings that you’re looking for in 2024, what’s the current run rate that’s in the 2020 base just so we can kind of think about how that builds?

[Christophe Beck:]

I think I’ll let you, Dan, maybe start the answer and I’ll help if anything.

[Dan Schmechel:]

Sure. Of course. So just to make sure that we’re talking the same numbers here, I think that we’ve disclosed an actual cost associated with the $365 million of anticipated savings of $335 million, of which at the end of 2020, $275 million has been accrued. Okay. So very good start across all of these programs. And from a run rate perspective as of the end of 2020, we’ve recognized about $200 million of total savings. So expect significant pickup in 2021 as you might guess. And then it will kind of more or less stabilize or bleed out over 2022 to 2024.

[Justin Hauke:]

Thanks. That’s helpful. And then my second one was just to make sure that we’re all level set. When you talk about 2021 adjusted earnings being in excess of the comparable 2019 level, I think you’ve disclosed a pro forma number that excludes Champion that was 520. So is that the number that we should baseline your comments on?

[Dan Schmechel:]

The number that we would steer you toward is the continuing ops number, which is 512 in 2019.

[Operator:]

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

[P.J. Juvekar:]

Yes. Hi. Good afternoon, Christophe, and welcome.

[Christophe Beck:]

Thank you, P.J.

[P.J. Juvekar:]

Yes. In your Institutional advancement program, where you’re investing in field reps and digital technology. Is that all for gaining share? Are your customers demanding this? And then how do you charge for it? Is it all through market share gains? And also, lastly there, where do you think is your competition in regards to this? Thank you.

[Christophe Beck:]

Great question. Thank you, P.J. Obviously, when we think about share, this is self-serving. This is not the way we think about it. It’s much more what’s right for the customer. And if there is one thing that we’ve learned during COVID, especially in Institutional is that customers need comprehensive solutions. When you think about an infection risk, while it’s not just about sanitizing your hands; it is making sure that the tables are being sanitized, the floors, the drains, the water, that the food is safe, that you don’t have any pests in there. It’s really – infection is related to the weakest point that you would have in that unit. And seen from the customer side is basically who is the partner that can help me protect everything I have in my unit? And the only one that can do that today, at least is Ecolab as such. So that’s the way the customer is looking at us. So it’s really making sure that we offer programs that answer that, and the Ecolab Science Certified as well is ultimately bringing it all together. If a unit has all the programs, it is as safe as it can be. Well, they get to seal and we promote that as well. So it’s good for the customer. It’s higher demand for us, so it’s good for us as well at the same time. So the whole organizational development that we’re making is ultimately helping to address that customer need.

[Operator:]

Thank you. The next question is from the line of Mike Harrison with Seaport Global Securities. Please proceed with your questions.

[Mike Harrison:]

Hi. Good afternoon.

[Christophe Beck:]

Good afternoon, Mike.

[Mike Harrison:]

Wanted to ask about your competitor, Diversey. They recently entered into a partnership with a water treatment provider to really go after the food and beverage market a little more aggressively. Do you think that could lead to some changes in the competitive dynamics that you’re seeing in Food & Beverage or in Water going forward?

[Christophe Beck:]

Well, two things here, Mike. First, we know that water and hygiene together is a winning proposition. We demonstrated that for years. But we know that partnerships do not work. It’s the second time that they are trying that. By the way, the first time was with Nalco many years ago and it didn’t work. So it’s hard enough within a company to get all the businesses working together towards one customer need. Doing that with partnerships is really hard. This is interesting to see. Theoretically, it’s a good idea. In practice, well, I wish them luck.

[Mike Harrison:]

All right. Thanks. And then on the downstream portion of the business, obviously, that’s under some pressure because of driving activity. But I wanted to ask the trend in refineries is toward larger and more complex, integrated refineries that have petrochemical production as well. Can you talk about the relative opportunity for Ecolab at one of these larger, more complex refineries versus, say, a handful of less complex refineries that have equal capacity?

[Christophe Beck:]

The petrochemical sites are different the sweet spot of our business in downstream. That’s where we sell most of the solutions. That’s where there is most demand from customers. That’s where the margins are the highest and where the outcome is the best as well. And many of those companies to the ESG point that was made before as well are interested in driving as well a better outcome from an impact on the environment as well at the same time. So this is the sweet spot. This is our primary focus as well going forward. We’re trying to get organized as well behind petrochemical in a dedicated way but that’s a little bit soft; more for the future as such. Whereas the traditional, older type of refineries are less of a priority for us. So you’re exactly right and that’s what we’re going after and that’s the way we’re getting organized to really capture that growth and the margin. And I’ll just conclude on one point. It’s basically that petrochemical in 2020 has been growing as well in a difficult environment, which is a proof of that approach working so really well.

[Operator:]

Thank you. The next question is from the line of Adam Harrington with Stifel. Please proceed with your question.

[Adam Harrington:]

Hi. This is Adam on for Shlomo Rosenbaum. I was curious if you could talk a little bit about what contributed to the margin level in the Health Care business this quarter and kind of what the interplay was between delivered product cost, mix, et cetera.

[Christophe Beck:]

So health care in 2020 in general has had very nice margin development. You’ve seen as well the comparison versus 2019. So a nice improvement. It was better in Q3 versus Q4 because the volume was higher because those one-time deals with governments were still impacting the business fairly heavily. So you got much more leverage as such. But that being said, the drive of program selling in health care, the focus on infection prevention, the digital technology, the pricing, the work on margin improvements, well, it has contributed to the margin improvement in 2020 and is going to stick as an improvement as well in 2021. So I feel good about the margin development in health care when I think 2021 and beyond.

[Adam Harrington:]

Okay. And in terms of the earnings for 2021 versus the 2019 level, I think you touched on this in an earlier question. Can you maybe just give a little more detail of what needs to happen there and how much of that improvement – expected improvement will be explicitly from like cost savings?

[Christophe Beck:]

So in order to get there, which we feel very confident to deliver an EPS in 2021 that’s ahead of the $5.12 in 2019, as Dan mentioned, it’s basically driven by three or four things. The first one is 80% of our business, so Industrial, health care, Life Science, growing, growing operating income in 2020 is going to keep doing that obviously in 2021. So those ones need to keep moving, and they will. They have good momentum. They have good new business, and they have propositions that customers are asking for, which is really good. At the same time, you need to have Institutional that turns the corner. As mentioned, it’s not going to be in Q1. It’s going to be very similar than what we had in Q4, but it’s going to be sometime in Q2. That’s going to catch up as well. So Q2, Q3, Q4, where Institutional is going to get back towards where it used to be as well, so pre-COVID. So that’s going to drive as well towards that outcome. And the third point, as you mentioned, so we have cost savings initiatives that Dan has been presenting as well that are helping. But it’s important to keep in mind that we will keep investing in the business. People are going to start traveling as well more. We’re going to give them merit as well as we do every year as well as such. So when you bring it all together, 80% of the business needs to keep humming, and it is and it will. Institutional needs to recover as of Q2 and the quarters to come, and we need to make sure that both on the cost savings and investment we balance that in a smart way and we will get to the right place in 2021.

[Operator:]

Thank you. At this time, we’ve reached the end of our question-and-answer session. I’ll hand the floor back to Mr. Mike Monahan for closing comments.

[Mike Monahan:]

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

[Operator:]

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may now disconnect your lines at this time. Have a wonderful day.