藝康 (ECL) 2002 Q2 法說會逐字稿

Good morning. My name is Danielle and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the second quarter 2002 earnings conference call. All lines have been placed on mute to prevent background noise.

After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1, on your telephone key pad. If you would like to withdraw your question, press star then the number 2. Thank you.

Mr. Monahan, you may begin your conference.

Thank you. Hello everyone, and thanks for joining us.

This webcast teleconference will include estimates of future performance. These are forward-looking statement and actual results could differ materially from those projected. Some of the factors to cause actual results to differ are described in section of our most recent form 10K under the heading forward-looking statements and risk factors, and in our second quarter earnings release.

We'd like to remind you that our pro formas for 2001 are available on the website in the investor information section, and are referenced in this discussion.

Now on to the numbers.

Second quarter results beat our previously stated outlook of 41-44 cents. We have continued to experience a gradual cover in the hospitality and travel industry, one that we believe will sustain its momentum as the economy and our industry show the further improvement generally expected over the balance of the year. We leveraged that recovery well in the quarter, and as you'll hear, posted improved sales and margins. Ecolab's reported consolidated sales for the second quarter rose 43%. Excluding acquisitions, and fixed currently rates, sales rose 2%.

Looking at the components, volume and mix were up 1 to 1 1/2%, pricing up 1%, and currency was a negative .6%. Sales for U.S. operations increased 4%. Volume and mix were up 1%. Pricing was up 1%. And acquisitions added almost 2%. Sales for the U.S. cleaning and sanitizing operation were up 2%. Acquisitions had no effect.

U.S. institutional sales continue to improve, rising 4% in the second quarter. Food service market, which represents the biggest part of institutional sales, continued to grow nicely, and we've experienced a steady and gradual recovery. Travel-related areas also showed improvement versus year, as well as from fourth quarter lows. Business levels have improved at a good rate, and we took advantage of the better trends to reduce promotions in the quarter. Leveraging the market growth, institutional sales force has focused its sales efforts, increasing calls on existing customers and pursuing new accounts, including previously discussed efforts toward street accounts. Also improved account penetration, increased sales training, and competitive gains, have also helped results. Recent new product introductions, like the new Solid Endurance Wear Washing lines, the Laundry Expert system for small laundry applications, and the Omega HT machine and product program, are all doing well, and there are more new products to come later in the year. We also achieved good productivity gains in the sales force and benefited from the agressive focus on costs we undertook last year. Looking ahead, we continue to expect improving gains for institutional as it focuses on the growing food service markets and leverages the gradual recovery of lodging through the balance of the year.

Kay sales are up 4% in this 2002 second quarter. Overall QSR showed good trends, 'though individual customers had mixed results. Kay worked aggressively in the quarter, pursuing new accounts and increasing penetration in existing accounts. The food retail service business continues to do well as rollups continue to do well with grocery chains. New products and programs also bolstered Kay's results, along with increasing demand for dispensing systems among the QSRs. We expect good results in 2002 second half as Kay benefits from improving QSR trends, and as the food retail business continues to grow.

Textile care sales increased 2%, while the end markets remained relatively flat, new products and service improvements helped turn results for the division in the quarter. While the overall market remains challenging, we think second half should see better results.

Professional product sales fell 9%. Lower distributor orders, due in part to inventory reductions, and comparising against last year's second quarter that included pipeline filling for the Unisource contract, cause the Janitorial sales to decline. Health Care sales declined modestly, as good results in skin care lines were offset by the discontinuation of a product line.

We continue to phase out some of the non-core specialty business, and this will offset expected sales gains in the core Janitorial and Health Care business over the balance of 2002. As a result, while the core business is expected to grow over the balance of the year, we continue to expect reported professional product sales will be flat to off slightly as we complete this repositioning.

Water care sales grew modestly in the second quarter, with the growth in the middle market offset by declines in non-core business as we slowly exit that market. Water care continues to benefit from our [ inaudible ] customer strategy, and in particular, sales to food and beverage, hospitality, and commercial institutional markets. We expect good second half results as water care continues to benefit from its cross selling activities.

Food and beverage sales rose 1% in the second quarter. Slow growth and consolidation in food markets was offset by aggressive new account activity, account retention strategies, and good results in beverage markets. New products like the [Inspects] meat and poultry carcass wash products, and Quadex, a new on-site product formulation system, helped results. The division is also strengthening its service reporting and customer retention efforts, and examining other ways to improve margin and expense performance. We expect the third to show further growth as the positive trends continue.

Eagle Care sales were flat in the quarter. The more expensive conveyor car washes experienced lower sales, perhaps due to the economy as consumers went downsale, while sales to the less expensive self service and gas station washes grew moderately. Eagle Care offset the slower conveyer market by adding more oil company business, where industry consolidation has actually benefited us as we picked up more market shares. Eagle Care's launch of the new solid detergents, called Solid Ovation, is under way and going well. It adds a highly differentiated product to this industry and gives us a strong competitive advantage. The Harmony product line launch is also going well. Harmony combines solids and liquids, in a line for conveyor markets, that will produce cleaner cars with less labor. We think these new products, along with focus on key account, will yield better sales gains in the second half of the year.

U.S. Other Services reported a sales increase of 14% in the second quarter. Excluding acquisitions, sales grew 2%. Pest Elimination sales grew 6% in the second quarter. Revenues were affected by soft lodging industry. In response, Pest Elimination is focusing its efforts on selling new customers, new market opportunities, intensified cross selling, more street business, and marketing additional services to existing customers, as it seeks to offset the current market conditions. Further, Pest is developing new programs to deal with emerging pest issues. We believe Pest Elimination will begin to post improving growth in 2002's second half and return to double digit growth next year.

Sales for the CGS commercial kitchen equipment business rose 23% on the quarter. Excluding acquisitions, sales were down 4% compared with last year. The quarter reflected the impact of the hospitality industry's slowdown in several of GCS's key tourism markets and the division's focus on building its operational structure. GCS is developing standard branch software systems, as well as operating procedures, to give it a uniform approach across the many acquisitions it has made to create national coverage. These systems procedures are being rolled out in a staged process and should give GCS a strong competitive edge when the rollout is complete. GCS is also adding key sales people to build its corporate account sales force and accelerate new development. Further GCS is developing programs to add new customers and increase business with existing customers. The second half is expected to reflect the impact these actions and show better organic sales and profit growth.

International sales measured in fixed currencies more than tripled, due to the addition of Europe at the end of 2001. Excluding acquisitions, international sales and fixed currencies grew 3%. When measured against U.S. dollars, international sales, excluding acquisitions, were flat. Sales in Europe rose 6% in the second quarter. Excluding acquisitions, sales roses rose 2%.

Europe's institutional sales increased 1%, reflecting distributor inventory reductions in the major countries where a higher portion of our business goes to distributors. The hospitality industry in Europe is weak, and U.S. and Japanese tourism levels have fallen considerably. Institutional has responded with an agressive sales effort, generating strong new business growth in independent street accounts, as well as picking up several new chain accounts. Competitive activity remains about the same as before. The new Echo Plus line of solid products has rolled out and doing well. We expect these new product and sales initiatives to yield improved institutional sales in the second half of the year.

The food and beverage business maintained strong sales trend. Reported sales rose 20%. Excluding acquisitions, sales increased a still robust 6%, despite the flat market. The division continues to benefit from concept selling, new customer gains, new applications within current customers, strong Pharmacos sales and new products like membrane care and thin film cleaning.

The Clean Care acquisition, which closed in January, is right on track.

Professional product sales were flat, as weak equipment sales offset modest gains in product sales. The market remains competitive, and near term sales for professional products are expected to be flattish. Textile care sales increased 3%. The division also faces many of the same market consolidation and pricing pressure issues as the U.S. New products like Oxysan and the Pace Laundry Systems have combined with energy and water management programs to promote sales, which may have application in the U.S.

Asian pacific second quarter sales grew 2% in local currencies. When reported in U.S. dollars, sales also increased 2%. Fixed currency sales continue to be good in southeast Asia and New Zealand, showing solid gains.

Looking at the segments, institutional recorded modest growth. East Asia grew nicely despite reduced travel in the region, which hurt hotel occupancy rates.

Sales in Japan were flat as they continue to suffer from a weak economy and deflationary environment, and the hospitality industry has suffered. Food and beverage sales showed moderate growth, led by strong results of New Zealand, where demand was driven by exports, and in east Asia where growing markets drove results.

Second quarter sales [ inaudible ] Canadian applications rose 4% in local currency, and 3% in U.S. dollars. Institutional sales, measured in local currencies, increase 6%, as the focus on new street accounts yielded good growth. Food and beverage sales rose slightly, and professional product sales were strong, led by gains in the health care industry. Laundry sales grew nicely in the quarter.

Sales in Latin America were up a very strong 10% in local currencies, and 1% reported in U.S. dollars. Excluding acquisitions, Latin America sales, in fixed currencies, rose 7%. Results were up in all countries, and were led by Brazil, Mexico and central America. This was an outstanding performance, given the challenging economies in Latin America. Our people worked extraordinarily hard to offset the impacts and did a terrific job.

Institutional leverage market share gains and new account development. These results were also helped by continued good growth in food retail programs and national account sales. Food and beverage rose double digits, capitalizing on the demand for improved sanitation, driven by exports, and by new programs for meat and poultry processors, the beverage market, and an expanded presence in the poultry, citrus, and seafood markets. The Brazilian and Pest -- and Mexican Pest Elimination acquisitions are doing well. We continue to expect good market share gains from the Latin America in 2002, as our people work to offset currencies and weak economic conditions in the southern cone.

Sales [ inaudible ] other international operations, including Africa and the Middle East operations, were hurt by the conflict in Israel. Sales declined 5% in fixed currencies. Sales in South Africa grew 6%, with strong strong results in food and beverage.

Turning to the expense side of the income statement, second quarter gross margins, excluding special charges, rose 51% for 2002, compared to the consolidated pro forma 2001 gross margin, including Henkel-Ecolab, up 50.5%. Ecolab's consolidated 2002 gross margin rose 50 basis points, benefiting from cost reduction actions and reduced promotional activities. The reported consolidated gross margin for Ecolab's second quarter, was 50.7% compared with 51.9% reported last year, which excluded Henkel-Ecolab.

SG&A expenses were at 37.6% of sales, down 20 basis points from 2001's pro forma margins of 37.8%. This favorable comparison reflects the benefits of the agressive cost reduction actions taken in last year's second half. SG&A margins improved for all geographic apperations. Reported at 2001 SG&A was 38.2% of sales.

Second quarter results included nearly $14 million of special charges related to plans management announced earlier this year to undertake restructuring and cost saving actions. Second quarter actions included work force reductions, product discontinuations, and acid write offs. Approximately $1 million of merger integration costs were also incurred. Further actions and expenses are expected in the second half of 2002.

Operating income for our U.S. cleaning and sanitizing business rose 12%. Excluding the effect of adopting FAS 142, operating income rose 7%. Adjusting for goodwill amortization, operating margins were 17.2, compared with 16.4%. The 80 basis point improvement reflected tight cost controls, savings from cost reduction actions, and new products.

Operating income for U.S. other services also rose 12%. Pest Elimination continued to show good profit growth, but GCS results were affected by investments in this infrastructure. Excluding acquisitions, and the effect of FAS 142, operating income increased 2%. On a constant currency basis, international's operating increased 223%. Excluding FAS 142 and acquisitions, operating income increased 14%.

Good profit gains were achieved in all major regions through new products and cost controls, which more than offset the strong U.S. currency that existed during most of the quarter and increased costs to import certain of our products that we only manufacture in the U.S. This also led to higher raw material costs for local country manufacturing operations. In U.S. dollars, and excluding acquisitions and FAS 132, international's operating income increased 11%.

Diluted shares outstanding were up slightly at 130.6 million shares. We will be accelerating our share repurchase program in the second half. The net of this activity is that it diluted EPS for second quarter was 46 cents from ongoing operations. Net income per diluted share, included special charges, was 40 cents. That's a review of the P & L.

In summary, we are very pleased with our performance in the second quarter, as improving sales growth, quarter market improvements, and excellent cost controls, enable us to beat our forecasted EPS range and post attractive growth vs. last year.

Just a short comment on our goodwill impairment charge. Net income for the first six months of 2002 includes a 3 cent transitional goodwill impairment charge. Under adoption rules of FAS 142, the goodwill in Ecolab's Africa export operations was determined to be impaired. As required, this was retroactively charged to first quarter 2002. Additional information was included on the last page of the press release.

Moving to the balance sheet, our total debt to total capitalization ended the quarter at 42% down from 44% at the end of the first quarter. Depreciation was $45 million in the second quarter, and amortization was $7 million. Capital spending for the quarter was $52 million. DSO was down 3.3 days from last year. That's the review of the second quarter.

Looking ahead to the third quarter, we begin by cautioning that the following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of business acquisitions or other material corporate transactions that may be completed after the date of this release. This business outlook section should be considered in conjunction with the information on forward-looking statements in our press release, which lists factors that may cause results to differ.

As discussed earlier, we continue to expect market conditions will show further improvement in the third quarter. We are working very hard to leverage these impacts and control our costs, and expect diluted earnings per share from ongoing operations to be 52-55 cents in the third quarter. The effect of one-time events, as well as other details, are shown in the press release. For the full year ending December 31, 2002, Ecolab continues to expect diluted earnings per shares from ongoing operations to increase to $1.80 to $1.83. Again, the effect of one-time events, as well as details, are shown in the press release.

Clearly, with strong earnings quarter under our belt, and an outlook for further strong EPS comparisons ahead, we are both very confident and optimistic about our future. Let's hope the Stock Market begins to share some of that optimism.

That concludes my remarks. This conference call will be available for replay on our website through August 2nd.

Now, before we go to questions, I have a guess guest speaker who just popped in, here. I want to turn it over to our friend, Al Schuman.

What a guest speaker, eh? Just want to come in to stop by, for a minute, to talk to you characters. You don't mind if I call you characters.

What the heck are you doing with our stock? I'm only kidding. Seriously, as you know, Ecolab is all about our shareholders value and our stock price. And I'm very concerned what's going on with our stock price. I really don't give a hoot about the market. I'm concerned with what happening to our Ecolab stock, which it shouldn't, and its many shareholders. But I want you to know, we are doing our best.

We're working aggressively, in all our businesses everywhere around the world, to deliver our earnings growth. So look at these numbers, and we're pleased to beat our estimates. I mean, I didn't think we were going to do that, but we beat it.

Further we raised the EPS target for the year ahead, and believe me, we are determined to hit it. We're also investing in our building and our businesses to sustain the growth in the future. And current world economic environment is no bed of roses, as you know. But if you know Ecolab, we're not going to take it lying down. We're faced with challenges before, and excelled, and we'll do it again.

We're excited, I mean, extremely excited, about our outlook, and the opportunities ahead. So, you'll stick with us as you have in the past, and I'm damn happy, and you'll be damn happy with the results. And, I must tell you, you are gonna like the third quarter, and love the fourth quarter, and we're gonna have a terrific 2003.

I mean, do I make myself clear? I'll just say that again. You'll like the third quarter, love the fourth quarter, and have a terrific 2003. How else can I put it. That's exactly what the score is going to be.

So, I'd like to stick around with you folks, but I have to go to another meeting. And so, I'll turn it back to Mike to finish up. Thanks, again, and stay safe.

And, I just want to make one comment about ethics, a little bit. I want you to know that we are a very straight company. You won't find anybody straighter than us, as you know what I mean by that, being from New York. As you know, we won awards for the last three years from our business ethics magazine. Ethics and integrity are highest importance to Ecolab. It's in our culture statement, and is the core of our tough code of conduct that every Ecolab associate has to sign every year. We won't tolerate any funny business here, and you have my word on that. So, if you're looking for a straight company, we are it. It's as simple as that.

Thanks, guys. I appreciate who you are and what you are doing. Thanks, again.

Thanks, Al.

And now, operator, would you please begin the question and answer period.

Thank you, sir.

I would like to remind everyone if you wish to ask a question, please press star, then the number 1 on your telephone key pad. If you would like to withdraw your question, press star, then the number 2. Please hold for your first question.

Your first question comes from Steve Jacobs.

Hi Mike.

Hey, Steve.

How are you doing?

Good, how are you?

On your comments, you referred to customer retention rates in several of the segments, I think. The one that, you said, really showed a good improvement was food and beverage. Could you give a little more color with regard to, you know, what kind of customer retention rates you've seen, and where they have improved, and where you think they can go from here?

I can't give you specific numbers by division, Steve, I don't have those handy. But that's something we've focused on, always, but particularly since, you know, the fourth quarter. And right now we're just not seeing any major accounts leave. So, I mean, we're, I think, doing a great job of holding on to those accounts and getting new ones.

Okay. A second question: how do you measure your productivity gains with the sales force? You mentioned you saw some of that this quarter.

Well, there's a lot of metrics that every division uses on its sales force. You know, sales per sales person. They break it down, you know, by territory, by type of sales person, et cetera. So there's a lot of metrics we use, Steve, to measure that. But at the end of the day, it's, you know, more sales per person.

And, could you quantify what that is, or indicate some sort of a increase?

Well, know know, I think as we've discussed before, sales force productivity varies by division. You know, at a food and beverage -- person may have a territory of over $1 million, whereas for a Pest Elimination person, if they've got a territory of $150,000, you know, they're doing good, because of the differing natures of the business. But, as we go through all the divisions, we've seen continuing productivity improvement, basically, across the board for everyone of the divisions.

Okay, thanks a lot.

Thank you.

Your next question comes from Karen Gulfennen.

Hi, Mike.

Hi Karen.

Good quarter.

Thank you.

Another thing, that you mentioned a couple of times, was reduced promotional spending, and I'm wondering if you could just elaborate on that a little bit.

Sure. Like any company, we do promotions, from time to time with various customers, and with our sales force, and all we are saying is that the pace of business, I think, was good enough, in this quarter, that we didn't have to do as much. It's kind of like, I'm always using the analogy, you know, Macy's has a dozen sales a year, you know, maybe one less.

Okay. And then secondly sequentially, your other services business, the operating income really jumped. Could you talk a little bit about why that may have happened? Was that the Pest business, or what was driving that?

That goes back to productivity efficiency improvements that we've seen.

Is it the sales force is selling more? So it's volume oriented?

Well, for other services?

Right.

No, it's mostly the efficiencies.

Okay. And then, finally, could you just give us a bit of an update on your restructuring? On some of the specific steps you've taken so far?

We're pretty much on target there. I'm trying to remember what the specific numbers was, but I think it was about 2/3 was people, about 1/3 facilities, and 1/3 others, and we are pretty much on target with that. We put estimates out at the beginning of the year, as to what we thought the costs would be from that, as well as the benefits, and on target for those as we go through the year. Again, we probably have a lot of them under our belt. We have a few more to go in the second half, but, again, I think we're pretty much on target with what we expected.

That's great. And the, just finally, the impact of the joint venture in the quarter to your bottom line?

What were the incremental EPS ...

Yeah.

... on the joint venture?

Yeah.

I don't know if I have that number, Karen. I'll have to get back to you with that. I don't have one available.

Okay, thanks a lot.

Yeah.

Your next question comes from Gil Yang.

Hey, Mike. A couple of questions. Could you quantify the inventory reductions in the professional products area?

In Europe or the U.S.?

Well, with respect to -- well, was it in both regions that you talked about?

Well, I talked about it in institutional Europe, as one of them. And in Janitorial U.S., we talked about comparison against the period a year ago...

Right.

the pipeline filling up.

Why don't you just give us both then.

Well, I don't have specific dollar figures for those, Gil. I'll have to get back to it, with something like that.

Or just percentage? Order magnitude?

It's like, you know, a couple million bucks. A million two bucks, something like that.

Each?

Yes.

Okay. And have you seen any -- and -- are you comfortable that in that business, the reason that professional products Janitorial was down is because of those inventory reductions, rather than any competitive pressures?

Oh, yes. Definitely. We haven't seen a change in the competitive situation.

Okay. And regarding the reduced promotional spend, can you -- you also made comments separately regarding new product, or new account penetration -- or new account efforts. When you reduce promotional spending, do you tend to reduce them across the board, or do you just reduce them in terms of cross selling, or do you also reduce efforts to get new customers?

Well, first, let me go back to follow up on your other question about distributors. We continue to gain new distributors in our Janitorial business, and we haven't lost any. So, again, we haven't seen a change in the competitive activity. We're improving that piece.

But in terms of promotional activity, no, all of ours are very targeted. I mean, this is not, you know, necessarily across the board. They're all very targeted. So, when we would reduce some, we would reduce some targeted specific promotional activities that we would have. You know, it might be, some special you have through your distributor. It might be a promotion you have in your sales force, something like that. So, all we looked, and saw that, with the pace of the business was good enough, that we said, hey, we don't have to do quite as much as we normally would, to get the number that we did. I mean, as it is, we beat the consensus by 4 cents. We beat our own range by a couple of cents. So we just didn't need to do any additional work to get there.

But can you at all characterize, for the reduction in promotional spending, is there any way to generalization in what areas it was, either in terms of businesses, or cross selling new products, or in new customer efforts? Or is it just sort of, some of, everywhere?

Just because it's the largest, probably the biggest impact was our institutional business, but there also in some of the other divisions. I mean, you know, we never slow down trying to get new customers. We're always being very aggressive in all those efforts. But, we just -- like I said, had to do less this time. You know, that meant that our sales growth might not have been as good as it could have been. But on the other hand, we certainly had the earnings there to produce.

Okay. Thank you.

Thank you.

Your next question comes from Robert Ottenstein.

Hey, Mike. I was wondering if you could give a little clarification on a comment you made in the introduction, and that was that you expected a better business tone in your markets in the second half of the year, which doesn't exactly jive, from what we are hearing from a lot of your bigger customers. And I'm wonderin', you know, what the basis is of that comment?

Yeah, you know, it's hard to say, compared to some of the comments that we've heard from some other people in the industry, you know, part of could be what their expectation was, coming in the second half. But when we look at industry data, on terms of lodging demand and food service expectations, they continue to be very favorable in the second half. I mean, one thing is, as you know, the fourth quarter is going to be a very strong, easy comparison for everybody, in particular the industry and Ecolab.

All right, but forgetting comparisons, on a sequential basis, you know, taking out seasonality.

Yeah, if I look at the PWC forecast for demand for the second half, it shows continued sequential improvement. If we look at the food service, information that we've seen shows continued growth.

And, what about in terms of conversations with customers?

Well, they continue to be very positive. I mean, chains are picking up a lot of new business. New units are opening. So, I mean, you look at this food service yourself, Robert, you go out to restaurants and we haven't seen any slowdown. Things are picking up and doing well, particularly in the food service side. So, in conversations with our people, our customers continue to be very positive.

Second, in terms of the fuller integration of the joint venture within greater Ecolab, I know you knew the business well, any surprises, positive or negative, is that going pretty smoothly? And any comments on that?

Really not much to say. The thing is going very smoothly. No surprises upside / downside. I mean, we knew it well. We put together a good plan and it's all working very, very well, and according to plan.

How about in terms of sales force retention?

It's good. [ overlapping voices ] There haven't been any issues.

No change, then. Okay, thank you very much.

I just want to add, Robert, that it's actually easier in this type of environment to get people and retain them as well.

Sure, well understood.

Okay, thanks.

Your next question comes from Jeff Chancey.

Close enough. Hey, Mike. Is that special guest still there?

Yeah.

Al?

Gosh, do I have to talk to you?

What? No, I had a question for you, Al, you know, regarding the second half, Al, look, when you said, you know, like with coming forward, I presume that your referin' more to the comparisons get easier as the year progresses.

Very frankly, yes and no. Because the third quarter is going to be pretty good. Okay? And the fourth quarter is going to be like a, you know, a 34% increase which is nuts. So, if you take a look at the third quarter and the progression to the fourth quarter, 34 is out of wack, okay, compared to this year. But if we didn't have that last year, we would have still grown double digit. Okay? And that's a lot. Somebody asked about -- Mike about, I think it was, Ottenstein, the number of -- you take a look at the new Cheesecake Factories that are opening up, the P.F. Chang's that are opening up, the Dardens that are opening up. There are all these new operations opening around the country, plus the fact that our guys are on a role now. They sold a lot of new business in the beginning. So, while the 4% might be out of whack, but double digit wouldn't. So, when you compare them both, you're going to have a hell of a fourth quarter.

Right. Just trying to figure out the cyclical component leverage. If we looked a year ago, we went down 14 cents, I think, in earnings from September, 44 down to 30 in December. How much of that -- is that roughly half seasonality and half a cyclical down turn? A good guess of the decline you saw in last the fourth quarter sequentially.

Well, it's probably, you know, in the range, Jeff. I mean, you can go back to the prior years and see what the seasonality falloff is, you know, between the third and fourth quarters. I'd have to go back and look myself.

That's roughly how it comes out. Okay.

And if I may, I just want to ask about international margins, now that you've all pro forma'd and consolidated everything with Henkel. It looks like a pretty good jump sequential, assuming that last quarter, first quarter, was a clean number, didn't have some one-off in there? Should we looking for the same seasonal pattern internationally, that third can be a double digit margin, once again?

I'm not sure what your question was, Jeff, could you repeat it?

International cleaning centers and margins had jumped here. You know, you did the acquisition, Henkel was folded in, you had, like, 6% in the first quarter, that's over 9%, looks like a pretty good jump. Maybe you could add color to that, and does that imply we go double digits, now, in the seasonal peak quarter, and, perhaps that suggests you get international into double digit by next year sometime.

I think, yeah, we look for double digit operating margins out of international. Typically, Jeff, it hasn't shown a lot of seasonality Typically, the margins for international have shown pretty steady progress in -- sequentially.

The fourth has historically been lower, just, I guess, last year and the year before, you had a little, I guess I'm getting at, Henkel is in there now. Henkel was a lower margin business. So, is there a turnaround in Henkel's margin, specifically, in the JV?

Ladies and gentlemen, please stay online. The leader has disconnected and he will be back momentarily.

Trying to find anybody left.

Yeah, everybody left.

Mr. Monahan, you may continue.

He didn't like the last question, ladies and gentlemen.

If you want to send him his retirement gift, per my office, you can do so. Small boxes are acceptable.

All right, that's the last time we'll have that guest speaker.

I'm sorry about that. Operator, are there any other questions?

Yes, sir. Your next question comes from Rosemary Morbelly

Good morning, all.

Mike, you mentioned the Pharmacos sales in Europe. Could you share with us the size of that particular business, which I don't believe you have in the U.S., or maybe you do, and it is so small I have forgotten. Can you give us a feel for that particular side?

It's a small business in the U.S., you know, I think maybe $5-10 million in size. But in Europe, it's about the same percentage of sales for the food and beverage division. Rosemary, I don't have a specific dollar number at hand.

Is there any particular reason why you cannot push, and get more of it in the U.S.?

No, absolutely not. I mean, there -- the thing is, Europe has been in that business longer, and they're very experienced, and we expect to learn a lot from them. One of the reasons that we haven't been -- haven't grown as fast in Pharmacos is simply because of the regulatory approvals to get through there are longer then they are, for obviously, of a food processing plant. So, it's a little bit of a challenge, and something we're all working through in that market.

So there's a chance, as you are all struggling and hustling, to use one of Al's favorite expressions, you should be able to get into that particular business in the U.S.?

Well, we are there, it's just ...

No, but I mean in larger way.

Yeah. I mean, that's one of the advantages of the deal, is we can bring more people in.

You also talked about Pests offering new services. Can you give us a better feel as to what you are now offering which you weren't before?

Well, .yeah, I mean ...

I thought you were killing all those critters.

Yes. One of the things we talked about before was the fruit fly program, swat program. Another one they're launching is the bed bug program. I mean, none of them are what you call really sexy things to think about, but they certainly do generate good revenue and meet customer needs.

And then, lastly, on the share buy-back in the second half, do you have a feel for how many shares or dollars you have estimated that you would get?

No. I mean, the point, Rosemary, is that, we'll be getting aggressive on repurchases. We're gonna balance the debt repayment that we got because the Henkel-Ecolab, with acquisitions, with the opportunities we have to but the stock, here. So, I think you'll see us very active in the market, coming forward.

Will you be buying more then just offsetting the options, which is more or less what you usually do, you don't really buy back anything, we never see that number come down?

We'll probably about balance shares for the year.

Okay.

Maybe a little more. It depends -- it depends on what happens here. If the market turns around and gets a little better, we don't won't have to do quite as much.

All right. And if I look in prior years, the difference, seasonally speaking, between the third quarter and the fourth quarter is around 10 cents. Any particular reason why this should shrink this year, Al, since you are so optimistic about Q4?

Well, the reason, obviously, for Q4 is going to be the comparison to last year. But on a sequential basis, we're still talking about, right now, probably a 6 to 8 cent difference.

Okay.

I mean, there still a sequential component to it.

Right. But it is still pretty much around the level of the third quarter.

Well, I mean, the third quarter we said 52-55 cents, which leaves about ...

I meant the second, I'm sorry.

Well, that's been pretty typical of the fourth, it's about the same as the second.

Okay. Just wondering if there was any change, given Al's level of enthusiasm.

Well, Al's always enthusiastic, but particularly when they he sees a comparative quarter like the fourth quarter will be.

Alright.

We'll have a good -- a good fourth quarter. I mean, no matter how you look at it, no matter how you dice it, it's going to be a very good fourth quarter.

Okay. Thanks.

Your next question comes from Kevin McCarthy.

Yes, good afternoon. Kevin McCarthy for Mark Gulley. First question relates to the ConAgra recall. Are you seeing any effect from that on your businesses?

Not -- no, not yet. But it will, okay. The same thing if you read in the "New York Times," and the "Chicago Tribune", et cetera, you'll see -- what the -- what they're talking about hospital sanitation, and 20,000 people, they feel, died last year because of some -- a simple thing of hand washing. And we are strong in the hand washing area, and we're looking forward, now, to make even bigger inroads in the same. But, it has to have an effect. We're testing products right now, in that area, on ConAgra's area, to help that industry, per se.

Okay. Second, with the equity market soon, you know, pension accounting is becoming a hot topic. Could you comment on the funded status of your plan, and any potential for having to put cash in in the future?

We think we're in good shape, Kevin. We, as you know, we've got a growing and young work force, which means, in a typical situation like that, that you are going to have, some of unfunded liability, but we believe that we're in strong position going forward. We don't expect to have to add any substantial dollars going forward. I mean, with the stock market the way it is, everybody's going to have to have something. We don't think we'll have anything out of the ordinary.

Fair enough. Finally, for Al, your comment on '03 is "terrific". Does that mean "terrific" like Ecolab has always been terrific, or even more terrific?

Ecolab terrific. Plus a bit or two.

Okay.

That's a very clear answer, correct?

I think I've sharpened my pencil now. Thank you.

Your next question comes from Demitri Silverstein.

Good afternoon, gentlemen. I have a couple of questions. One, when you talk about -- if you look at the 2001 restatement that you've given, along with the report, the SG&A went down quite a bit and cost went up, which is understandable, a lot of companies have been reclassifying expenses, but also sales have gone down by the difference. Is that just a matter of where you are internally now reclassifying some discounts you've been giving against sales rather than against SG&A?

Yeah, I mean, we, Demitri, we talked about that the last quarter, that certain rebates and discounts were reclassified from SG&A into sales, net of sales.

Okay. Now, does that -- if I look at the growth rates that you've been posting, would I have to go back to 2000 and do a similar reclassification or have you changed the way you've done things in 2001 versus 2000.

We only restated those for 2001.

Okay. But if I'm looking at your historical growth rates, would I need to restate those for 2000 as well?

Yes.

Okay. So basically, we're now looking is apples to apples going forward, in terms of top line growth. Is that correct?

What was that?

I said, so basically we are looking at apples to apples now, going forward, in terms of top line growth. In other words, the 2000 number is -- needs to be restated in order to get the correct growth rate in 2001 with a little more revenue.

Right. But you know, you've got that. If you look at the as-reported 2001 versus 2000, you've got the growth. And now that we've restated 2001, that's consistent with 2002. So you've got it both ways right now.

Okay, that's what I thought. Okay.

Second question is, in improvement in Henkel, how much of that had to do with foreign exchange more positive on the earnings side. On the revenue side, I think it's fairly self explanatory, but how much of an impact was it on the margin?

Not much at all.

And that was because -- you didn't see -- I mean, the Euro appreciated pretty significantly, so why wouldn't you see that on the margin?

It's a May 31 year, Demitri, so there wasn't much impact.

Right, okay. Okay, we'll see more in the third then?

Yeah. Okay.

Alright, fair enough. And, okay, Rosemary asked about authorization. I missed part of that answer. Do you have a specific dollar amount or amount of shares you have under authorization for repurchase?

Yeah. We've got over 4 million shares still under authorization. [ Overlapping voices ]

Okay, but you don't foresee utilizing much of that this year, unless the market remains where it is, in terms of your stock price?

Yeah. I mean, we're going to go out, and we're gonna buy stock, and, you know, we're gonna certainly neutralize the programs, and hopefully do more.

Okay. Thank you very much.

Thank you.

Your last question comes from Stewart Pulbarin.

Hi, Mike.

Hi, how are you doing?

Okay. Just saying, this crazy world, I haven't been on an Ecolab call in about ten years, but it's almost -- some of the same people, and slightly different questions. In your outlook going forward, the only concern I have is that the business travel environment hasn't improved. I don't know if you answered this before, but, if it doesn't improve, is that kind of, like, what you're going on, your base cases, not hoping for that kind of improvement to help the institutional business in doing the things, you know, the fundamentals right, and any, let's say, snap back in that, would be more like gravy?

You know, it's nice to have a veteran back, Stew. So, welcome back.

But, in terms of the lodging industry. First of all, it's important to find out that, while a lot of people focus on lodging, it is only 15% of our business. You know, food service, which is a much larger part, 30% of our business, is growing very, very nicely.

Within lodging, though, which is, again, you know, that 15% of the business, we are seeing improvement. If you look at the Smith travel data, it's showing demand is coming back, very consistently, from the fourth quarter lows. Demand is at about right now about break even, expected to improve in the second half into 2002. 2002, overall, should be up nicely. So, you know, lodging is coming back. We're certainly seeing that in the Smith travel numbers. It's expected to continue into 2003 And that should be beneficial, and that's what we based our expectations on.

Okay. I mean, the only thing I was looking at is the -- maybe upscale sectors are not -- if you just looked at the last few data points, which is, slower to come back then people thought. But of that 15%, then, there's only a certain percent that -- in the upscale sector, right?

Right. I mean, we're pretty evenly spread across all of those. So, you know, we'll get our share, but again, just remember, this is 15% of our overall business. We have a lot of other pieces that are growing pretty well.

Great, thanks.

Thank you.

There are no further questions at this time. Do you have any closing remarks?

Well, not really, operator. Thanks very much.

Everyone, thanks for your time. I know that there's a ton of calls today you have to get running. So, we'll let you go.

If you have any questions, we'll be around today and tomorrow. Please give us a ring.

Take care.

Operator: Thank you for participating in today's teleconference. You may now disconnect.