藝康 (ECL) 2002 Q3 法說會逐字稿

Good afternoon. My name is Linda and I'll be your conference facilitator today. I'd like to welcome everyone to the Ecolab third quarter earnings conference call. All lines have been placed on mute to prevent any 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 and then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad.

Thank you, Mr. Monahan. You may begin your conference.

Hello, everyone. Thank you for joining us. This web cast conference will include estimates of future performance. These are forward-looking statements and actual results can differ materially from those expected. Some of the factors that can cause it to differ are described in the section of the most recent form 10-Q under the heading "Forward-Looking Statements and Risk Factors" in our third quarter earnings release. We'd like to again remind you that our pro forma are available on the website in the investor information section and referenced in this discussion.

Now, on to the numbers. Third quarter EPS from ongoing operations beat our previously stated outlook at 52 to 55 cents. We have continued to experience a gradual and steady improvement in the hospitality and travel industry and based on current industry forecasts we believe the recovery will show further improvement into next year. We expect to continue leveraging in that recovery and sustaining our sales improvement. Eco Labs consolidated sales for the third quarter rose 47%. Sales rose 7% excluding acquisitions. Looking at the components, volume and mix were up 3%, pricing was up 1%, and currency was a positive 3%. Sales for the U.S. cleaning and sanitizing operation were up 5%. Acquisitions had no effect.

U.S. institutional sales growth continued to improve, rising 5% in the third quarter. The food service market which represents the biggest part of institutionals and Ecolab sales continue to grow nicely, and we have experienced further steady and gradual recovery. Travel related areas continue to recover as well, rising moderately and consistent with the second quarter's better trend. Leveraging the market growth, institutional sales force has focused its sales efforts increasing calls on existing customers and continuing its pursuit of new accounts, including the previously discussed efforts towards street accounts as well as an unrelenting effort toward change. Also, competitive gains, improved account penetration and increased sales training have helped results.

Recent new product introductions are also doing well, and there are more new products to come later this year. We also achieved good productivity gains in the sales force and benefited from the aggressive focus on cost we took last year. Looking ahead, fourth quarter sales will enjoy an easy comparison and should show double digit gains for institutional. Further, food service and room demand are expected to accelerate into 2003, and we believe that improvement will create a good backdrop for a return to institutional's traditional strong growth trends.

Kay sales were up a resounding 11% in 2002 third quarter, led by good gains in QSR and strong growth in food retail. While QSR industry is showing moderate growth trends, Kay has outperformed it through a combination of new account growth better account penetration and more effective field sales coverage. Further, an increased emphasis on sanitation by several of Kay's major customers also benefited sales. The food retail business continues to do very well, as rollouts continued with major grocery chains and new chains were signed up.

New products and programs also bolstered Kay's results along with increasing demand for dispensing systems among the QSRs. Further, we are looking at Internet-based information solutions in food retail that would provide value added for our customers. We expect continued good momentum in Kay's fourth quarter and into 2003 as a division leverages the QSR trends and as the as the food retail business continues to grow.

Textile care sales increased 2%, showing the effects of the new management actions. New account sales, new products and service improvements helped turn results and restore growth for the division in the quarter and offset flat end markets. While the overall industry remains challenging, improved execution within the division should yield good results in fourth quarter.

Professional product sales were flat in the quarter, reflecting the exit of non-core product lines as discussed in prior calls. Janitorial sales grew 10% for the quarter reflecting strong corporate account growth and new product sales. Healthcare sales grew modestly as good results in the skin care lines were offset by the discontinuation of a product line. We continue to phase out some of the non-core specialty business. 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 in the fourth quarter will be off slightly, as we complete this repositioning.

Water Care sales were off 6% in the third quarter with flat results in the middle market offset by declines in the non-core business, as we slowly exit that market. Water care continues to benefit from our circle the customer strategy and in particular, sales to the cruise, food and beverage, hospitality and institutional markets. However, sales to these markets were affected by lower customer usage during the quarter. Given the trends in the economy and the markets, sales are expected to be about flat in the fourth quarter.

Food and beverage sales rose 4% in the third quarter, reversing the last few quarters' slower trends as a focus on new account gains and account retention-led results. Good growth in the food, meat and poultry areas benefited from improved customer trends and new products. Including Inspexx and Quadexx. New account gains led the growth in beverage and dairy plant sales rose nicely as we picked up new accounts. Partially offsetting these low trends was the impact of low milk prices and the drought on the agrobusiness.

Food and beverage will continue its aggressive new accounts and retention efforts as well as leverage its new products to sustain at a renewed momentum. As a result we look for continued sales gains in the fourth quarter and into next year.

Vehicle care sales were off slightly in the quarter. Industry sales appear to have softened due to the slow economy and drought in much of the U.S. Vehicle care worked to offset the slower markets by adding more oil company business where industry consolidation has actually benefited us as we picked up market share. Vehicle care's launch of the new Harmony product is going very well and we're looking at further product introductions in the coming quarters.

We think these new products, along with a focus on key accounts, will enable vehicle care to offset much of the industry slow down, but still look for modest growth in the fourth quarter.

U.S. other service operations reported a sales increase of 18% in the third quarter. Excluding acquisitions, sales grew 5%. Pest elimination sales grew 8% in the third quarter showing an improved growth rate over the first half 6% rate as momentum picks up. Previously reduced service volumes have been restored by new customers, new contract sales continue to expand, and ancillary services like the bird and termite programs did very well in the quarter.

New programs like those for food retail are doing well. Pest elimination should continue to show improved sales growth into fourth quarter and into next year. Sales for the GCS commercial kitchen business rose 31% in the quarter. Excluding acquisitions, sales were flat compared with last year. Quarter reflected the division's focus on building the standardized operational structure, and the impact of the hospitality slow down. GCS has a new management team, including a new general manager, a new controller, and a new VP of marketing. All added within the last quarter, and all with experience in the service area. They are leading the development of standard branch operating procedures to give GCS a uniform approach across the multiple acquisitions it made to create its national coverage. This approach is being rolled out in the stage process, and should give GCS another competitive edge when the rollout is completed next year.

Fourth quarter's expected to reflect the impact of these actions and show better organic sales and profit growth. International sales measured in fixed currencies nearly tripled due to the addition of Europe at the end of 2001. Excluding Europe and other acquisitions, international sales in fixed currencies grew 1%. When measured in U.S. dollars, international sales excluding acquisitions were flat. Sales in Europe rose 5% in the third quarter. Excluding acquisitions, sales rose 2%. Europe's institutional sales increased 3%, as strong new account activity worked to off-set a weak business environment in Europe. Overall, European hospitality demand is still off. It is estimated that tourism is down over 10%, and the impact of floods has hurt regional areas and local travel.

This is further compounded by the economic problems in major countries like Germany. Institutional has responded to the tough conditions with aggressive sales efforts 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. We expect these new products and sales initiatives to yield institutional sales growth in the fourth quarter. In the food and beverage business maintained its strong sales trends. Reported sales rose 16%, excluding acquisitions, sales still increased a strong 5% despite the flat and consolidating market. The division continues to benefit from concept selling. New customer gains, new applications within current customers, strong food processing, and pharmacos sales and new products like membrane care and film thin cleaning. Kleen Care acquisition, which closed in January, is on track and doing well.

Professional products to the sales declined 10%. Customer demand remains weak and the market is very competitive. Near term sales for professional products are expected to be challenging. Healthcare sales rose 21% due to easy comps. Adjusted for last year, sales growth was 6%. Healthcare marketing in Europe is reflecting many of the same conditions as the U.S., but the government cost controls and limited growth in the hospital area offset by opportunities in the small practice and nursing home markets.

Textile care sales increased 7%. The division faces many of the same market consolidation and pricing pressure issues as in the United States. New products like Oxy San and the Paste Landry systems have combined with energy and water management programs to promote sales which may have application in the U.S.

As you may have seen, we entered the European pest elimination market in late September through the acquisition of Terminix business in the UK and in Ireland. There was no impact from this acquisition in the third quarter. The acquisition add a key circle the customer business to our European portfolio and will boost long-term sales and margin growth. We are continuing to look for more pest elimination acquisitions in Europe, as well as other businesses to broaden our circle of customer strategy. Asia Pacific's third quarter sales fell 1% in local currencies, and reported in U.S. dollars, sales increased 4%. Fixed currency sales continue to be good with northeast Asia and New Zealand showing solid gains. Looking at the segment, institutional sales were soft, east Asia was flat as a result of reduced travel on the region which hurt hotel occupancy rates. Sales in Japan grew modestly as they continued to suffer from a difficult economy and deflationary environment. And the hospitality industry has suffered.

Aggressive new account sales are offsetting volume reductions elsewhere.

Food and beverage sales declined slightly, primarily due to Australia where results were down due to the sale of the hygiene services business. New Zealand continues to produce strong results as demand continues to be driven by exports and east Asia where growing markets drove results. Third quarter sales for the Canadian operations increased 1% in local currency and were down 1% in U.S. dollars. Institutional sales measured in local currencies increased 1% as a focus on new street accounts yielded good growth.

Food and beverage sales were flat and professional product sales rose slightly, buoyed by gains in the healthcare industry. Laundry sales also grew modestly in the quarter also. Sales of Latin American were up 7% in local currencies but decreased 8% when reported in U.S. dollars. Excluding acquisitions, Latin America's sales in fixed currencies rose 6%. Results were up in nearly all countries and were led by Brazil, Mexico, Central America and surprisingly Argentina. This was an outstanding performance given the challenging economies in Latin America. Our people work extraordinarily hard to offset the difficult economies and did a terrific job.

Institutional had good growth as it leveraged market share gains and new account development. These results were also helped by continued good growth in the food retail programs, and national account sales. Food and beverage sales also grew nicely, capitalizing on the demand for improved sanitation driven by exports, as well as new programs for meat and poultry processors, the beverage market and an expanded presence in the poultry, agri, and seafood industries.

The Brazilian and Mexican pest elimination businesses are doing well. We continue to expect good market gains from Latin American 2002 as our people to work to offset currencies and weak economic conditions in the Southern Cone. Sales for other international operations including Africa and the Middle East operations were hurt by the conflict in Israel. Sales declined 2% in fixed currencies. Sales in South Africa grew 13% with strong results in all the businesses. Turning to the expense side income statement the third quarter the gross margin excluding special charges was 51.5% compared to the consolidated pro forma 2001 gross margin including Henkel-Ecolab of 50.9%. The consolidated gross margin rose 60 bases points, benefited from product mix improvements and cost reduction actions.

The reported consolidated gross margin for Ecolab's third report of 2002 was also 51.5% compared with 52.5% reported last year, which excluded the lower margin Henkel-Ecolab business. SG&A expenses were at 36.6% of net sales, 30 bases points above 2001's pro forma margins of 36.3%. SG&A expense rose due to higher selling expense, bonus accruals, as well as comparison to the year-ago period when costs were constrained in the weak economy in post September 11 environment.

Reported third quarter of 2001 SG&A was 37.0% of sales. Third quarter included $2 million of special charges related to plans that management announced earlier this year to undertake restructuring and cost saving actions. Third quarter actions included work force reductions, product discontinuations and asset write-offs. Further actions are expected in the fourth quarter of 2002 as we complete the restructure efforts. Operating income for our U.S. cleaning and sanitizing business rose 13%, excluding the effect of discontinuing goodwill amortization from adopting FAS 142, operating income rose 9%. Excluding goodwill amortization, operating margins were 18.8% and compared with 18.1% last year.

70 bases point improvement reflected tight cost control, savings from cost reduction actions and new products. Operating income for a U.S. other services rose 21%. Pest elimination continued to show good profit growth. While GCS results improved, they continued to reflect investments in our infrastructure. Excluding acquisitions, and the effects of FAS of 142, operating income increased 9%. On a constant currency basis, international's operating income increased 181%. Excluding FAS 142 and acquisitions, international operating income increased 6%. Profit gains were achieved in all major regions through new products and cost controls. In U.S. dollars and excluding acquisitions and FAS 142, international's operating income increased 17%.

Diluted shares were up slightly at 130.6 million shares. We repurchased 130,000 shares in the quarter. The result of this activity is that diluted pro forma EPS for the third quarter was 56 cents from ongoing operations. On a reported basis, net income per diluted share including special charges was 55 cents. Of this, currency was a penny a share positive.

That's a review of the P & L. In summary, we are very pleased with our performance in the third quarter as improving sales growth, core market improvements and excellent cost controls enabled us to beat our forecasted EPS from ongoing operations, and post attractive growth versus last year. Moving to the balance sheet, our total debt to total capitalization ended the quarter at 39%. Down from 42% at the end of the second quarter. Depreciation was $47 million in the quarter, and amortization was $8 million. Capital spending for the quarter was $41 million. DSO was 58.7 days, down five days from last year's pro forma results, including Europe. Ecolab's pension plan assets, like those of most corporations, declined in 2002. We have not yet made final decisions on funding, we are likely to make some cash contributions to the plan before year end, and, in fact, may begin sooner rather than later in a modest fashion. As you know, the total amount of the cash contributions in 2002 will depend on the performance of the plan assets before year end. The last few weeks have been beneficial. Cash contributions we are considering making would not have a material effect on our business.

Currently, we expect the pension plans and P & L expense in 2002 before Europe to be in the $20 million range compared with $17 million in 2001. Expense for 2003 is dependent on the discount rate which we'll determine at the end of the year as well as our final funding decision.

That's a review of the third quarter. Looking ahead to the fourth 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 they that may be completed after the day of the 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 strong earnings comparison in the fourth quarter as continued good results from new account activity, new products and improved operating trends in several areas benefit results and we compare against the impact of 9-11. We expect pro forma diluted earnings per share from ongoing operations to be in the 41 to 44 cent range in the fourth 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 expects pro forma diluted earnings per share from ongoing operations to increase to the $1.80, $1.83 range. Again, the effect of the one-time events, as well as other details, are shown in the press release. While we have yet to complete our plan for 2003, we believe consensus estimates for full-year 2002-2003 look reasonable. Clearly with a strong earnings quarter under our belt with an outlook for further strong EPS results ahead, we are confident and optimistic about our future.

That concludes my remarks. This conference call will be available for replay on our website through November 5. Operator, please begin the question and answer session.

At this time, I would like to remind everyone if you would like to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Mr. Robert Ottenstein, Morgan Stanley Dean Witter.

Mike, nice quarter.

Thanks.

The SG&A is coming up a little bit and as I model it for Q4 based on the guidance the absolute amount looks like it's going to increase sequentially again. Is this all accruals for having a good year or are you starting to pick up the sales force hiring? If so, to what degree?

It's little bit of both, Robert. For one thing, we are starting to see the benefits of the good business flow through the SG&A where we're getting higher sales commissions being reflected in SG&A on an absolute level, as well as bonus accruals. Whereas last year we were unwinding the accruals as the business tailed off. And the second thing is, we are hiring again. I think we'll still be consistent with what we talked about before, 2% or 3% increase this year for head count.

Okay. And is that pretty much all on the last two quarters?

Head count is about --it's up about 1% year to date, so, you know, I think we'll have some more in the fourth quarter. But --

Well, it has to be, if you're saying it's 2% for the year, then it's got to be substantial in the fourth quarter.

Sure. We're halfway there by now.

Okay. You mentioned that you changed management at GCS. Has there been any of if other divisions where management has changed recently? I mean, vehicle care continues to under perform. Just wondering, you know, do we have any other changes here and what the plan is for vehicle care?

No, there hasn't been anything recent, Robert.

And in terms of turning around vehicle care?

Well, we have a lot of plans in place, as we have shown. We have a lot of new products hitting the market. We have been very aggressive about going after the oil companies. What we saw in the industry was really down in the third quarter, across the board. Whether it was conveyors. It was the oil, even the fleets like the rental cars are still off from last year.

And just one last question. You had indicated that food and beverage and Kay, you know, were picking up and you expected that to continue. What is your level of confidence there that, you know, there are really fundamental changes either because of new product, new marketing strategy, that this will continue to improve?

I think that F & B and professional products the ones you mentioned

No, F and B and Kay.

Oh, and Kay. I think they're both in very strong positions. I think that F&B have restructured and have refocused themselves on specific markets. They have done a very good job of going out and securing new accounts. They have taken a chapter from the institutional book, and aggressively approached to new accounts that they went after this year. They had a similar program to operation overload, which had a different name, but went after a lot of new accounts. In Kay, I think you'd see them, they have done a great job in picking up the big chains and going after the smaller chains as well. Further, they'd broaden their business with the food retail business and they have a lot of growth left for that business. I think both are in strong shape and should continue to do very well.

Thanks a lot, Mike.

Thank you.

Your next question comes from Marybeth Connoly from Goldman Sachs.

Hi, Mike.

Hi, Marybeth. How you?

Good. I have a couple of quick questions. First of all, in the fourth quarter guidance, it seems you didn't explicitly say it, but it seems like it's being guided down by maybe a penny or two. I'm hearing pretty good comments in terms of the outlook for the businesses, so I wanted to find out if you could give a little more detail on your thought for the quarter coming up.

Yeah, I mean first we never had an explicit forecast for the fourth quarter. What we have done this quarter is we have sustained our forecast for the full year, which has always been the $1.80, $1.83. So I think the positive news is very clearly that we continue to look for a strong year of double digit growth this year. As we said in our comments, we're looking for a double digit growth into 2003.

Okay. You think that the consensus is maybe a little overstated there, it didn't have anything to do with guidance?

Right. I think it had to do with more or less what your analyst estimates were. At the same time, international markets are not anything to write home about. Europe is low and we have seen what happened in Latin America. But the bigger issue is we had $1.83 for the year and analysts had different quarterly breakouts than we did. We did a little bit better this quarter. For the full year, we're continuing to look for a good increase in the fourth quarter for the full year this year and next year as well.

Okay. I just wanted to make sure, you know, you weren't taking into account any of the increased terrorism activity, et cetera, maybe in southeast Asia, that sort of thing. If that was playing into your outlook.

I'm sorry, Marybeth, what was that?

I was making sure you aren't including in your guidance or your outlook any additional terrorism activity in Southeast Asia.

No, we haven't forecast anything.

So you're looking for increasing trends in hospitality?

That's right.

One other question. What were your EBITDA margins --

Operating margins. Trying to figure out if they're increasing and what the drivers are. Okay. Great, thanks.

[inaudible]

Your next question comes from Mark Gulley with Banc of America.

Good afternoon, Mike. I have three questions for you. One, where do did the new GCS employees come from?

They're all outside the industry, and -- pardon me outside of Ecolab. As far as the commercial equipment service industry, no, they're from different related service industries. As you know, we're the largest by far in that particular industry. So it would be tough to find somebody with, you know, bigger experience than --

Okay. Secondly, your DSOes and inventory supply outstanding base supply they look good in the quarter sequentially as well. To what do you attribute? I think the working capital performance has been good, maybe two quarters in a row now, to what do you attribute the good working capital performance, anything specific?

I think it's the new CFO and controller. I'm just kidding. No, we've had a very clear focus on that business, and I think the second thing is business has gotten better, we have been able to step up collections. As we talked about before, one of things you're doing, if you're partnering with a customer, they're in tough times you have to work with them. One of the things we did was extend some terms. Now that things are better we can bring them back to normal.

Do you see further improvement there, a bounce from this year into next year?

Probably a little bit.

The third thing, on share repurchases, you had indicated I believe in the second quarter conference call that you had four million share authorizations and you suggested to be kind of aggressive in buying back stock. You had 130,000 their shares doesn't sound aggressive. Can you give us a color there?

I think the market helped us out on that one. Our goal for cash flow has been number one, debt reduction. Number two acquisitions and number three was share repurchase. So I think that what we saw is number one, the market got very strong and that we could devote our cash assets to investments in acquisitions as you have seen, as well as paying down some additional debt.

Okay. Finally, any feel for what acquisitions could be next year? 2003.

I mean, you know the acquisition business, Mark. Every year we have a long list of acquisition an some years we hit home runs and get them down and sometimes we have not done as well. So we're very aggressive in looking at things. As mentioned, we're continuing to focus on Europe. We have expanded our service offerings there, but also in the U.S. we're looking for new services, et cetera. If you talk to our people, they have -- they have a robust list that they're looking at and they're very active. It all depends on when they fall.

Thanks, Mike.

Thank you.

Your next question comes from Dave Begleiter with Deutsche Bank.

Thank you. Hello, Mike. I missed your response on the European OBIT margin question. Can you discuss in terms of the improvement there and what we can look for next year in the operating margin?

It was around 10% in this quarter, David. Remember, that's seasonally strong period, so I think the year to date was around 8%. As for next year, we haven't done our budgeting yet, so I haven't seen a forecast, but I know it will be driving for margin improvement.

And Mike, on --you talk about promotional spending in Q3 and Q4? Is that being ratcheted down or maintained at current levels?

No. I mean, we're reducing it.

Can you quantify that at all or --

You know, I don't have a number in front of me, David. It -- it was like five, ten million bucks. Something like that.

And lastly on bad debt trends in the quarter and for the year, can you discuss those?

Pardon?

Bad debt expense trends.

No change. I mean, nothing significant.

Okay. Thanks a lot.

Your next question comes from Chris Kapsch with Black Diamond Research.

Hi, Michael. I was hoping to focus on the domestic institutional sales trends and I was hoping you could delineate. I think you said the domestic sales growth was 5% in the quarter, so I was hoping you could delineate a couple things. How important was the Cisco -- if material, the Cisco joint promotional effort to that number and also do you have at least maybe by order of magnitude what was there greater sales versus director have us is direct distribution? Do you have any color on that?

Yeah. The Cisco business might have been another $5 million or so. I don't have the number in front of me, Chris, -- I have to get back to you on a precise number. As far as direct versus distributor, since the Cisco effort was under way in the year, we have seen more out of distribution than direct. But that's kind of reflecting a specific program that we had.

Is there an order of magnitude like, in other words, any idea what the seams growth was for the direct institutional business and domestically?

Yeah. The direct business continues to grow very well. The business is up proportional over 5%. I can't recall what the number is, but it's not a big switch one way or another.

Okay. Thanks.

Okay.

Your next question comes from Steve Jacobs with Piper Jaffray.

Hi, Mike.

Hi, Stephen.

On the balance sheet, if you gave these numbers, I apologize, but did you give cash and stockholder's equity numbers?

No. They're in the press release, but cash was $95 million and equity was 1.52 billion.

Thanks a lot. Sorry abut that. Then on several of your comments on your segments, you talked about higher customer retention. Could you give us any, you know, quantification in terms of what customer retention was and where it is now? Any more color there you can add?

I can't really add it on a corporate basis, because we look at it divisionally. But, you know, I think retention remained high across the board. But, you know, to give you a number, I don't have a corporate-wide number because it's all divisional.

What about one specific division as an example? Could you give us anything there?

In terms of a number?

Well, yeah, in terms of what the customer retention rates were what they fell to, have they improved? Is there any --

Well, I mean best estimation customer retention is around 85%. I can't tell you on a quarter by quarter basis, I don't have those numbers in front of me, Steve, but, you know, it's always remained high institutional is not far from there. You know, Kay is -- at least that good, too. So kind of running down the divisions you have to go through them, which I don't have in front of me again.

Okay. With regard to the fourth quarter, special charges, you said they'll be some ongoing charges in this quarter. Do you expect kind of the same level of the third quarter, a little more or less?

Well, we outlined them in the press release. We're expecting 48 cents.

And lastly, with regard to corporate expense, coming in at $2.4 million for the quarter, that seemed to be, you know, pretty low versus what I was expecting. What do you think it will be for the fourth quarter?

Well, the corporate expense is the special charges which is the restructuring cost.

That's all it is?

Yeah.

Okay. Great. Thanks a lot.

Okay.

Your next question comes from Jeff Cianci with UBS Warburg.

Close enough. Mike, the European --

Jeff, you're sounding more romantic.

Please, later. The European margin trying to figure out the swing in cost savings and how much of that. Clearly, we've got a weak economy over there and you're not feeling it. So is this all the cost actions on the bottom line? Have you reinvigorated the top line? Is it a share gain game? What are we in each of those in Europe and against the backdrop are you indeed seeing the slowdown that industrial producers are over there?

Yeah. I think looking at the numbers, it's clearly slowed down from a year ago. And as we said, tourism is off. Not only because of general economy, but also because of some specific, you know, --but in terms of what inning you're in, in terms of sales growth as well as margin improvement, I still it's early innings by far. You know, for example on the revenue growth, you saw we had just added Terminix. That's clear statement.

I think the revenue growth, I think that's early, but is the cost swing the reason now for the improvements?

No. I mean there's some synergies we picked up and margin improvement, but there's clearly growth. As you saw in the food and beverage business, it was up, you know, 5%, 6%, 7% year to date. Institutional has continued to do well. This quarter was a little rougher, but for the first six months it was very good. And we have lowered the cost structure. We have made certain raw material cost improvements as part of the synergy. You can't pin one on the other. There was a combination of things. It's all positive.

I think you said earlier it was seasonably strong, but I thought it was seasonably weaker?

No. Typically, you look at the quarters for Europe and it's the second half is stronger than first.

The second half, yeah. You did get the summer slow down. You did the 10% margin with a summer slow down, particularly in the south, suggests you might stay above double-digit margins going forward. Were you trying to indicate that margins may dip back down in Europe?

Well, you know, again, as part of the seasonality of their business. So, I mean the second half is seasonably stronger than the second half. You're right, the second half margins are not going to be as strong as first half margins. They're going to be stronger than the first half margins next year.

Okay. I'll leave it there. Thanks, Mike.

Okay.

Your next question comes from Karen Gilsenan with Merrill Lynch.

Hi, Mike. If you look at the effect of the joint venture on the bottom line after, you know, financing costs and so on, what was the impact in the quarter? I think you shared with me it was about three pennies positive in the second quarter. What did that look like in the third quarter?

About two cents.

About two cents positive. Currency, was that an impact on the top line?

It was about a penny to the bottom line.

About a penny to EPS, okay. And then finally, in your prepared remarks -- when you were talking about Kay, I thought it was kind of interest one thing they benefited from was an increased focus on sanitation by customers. Is that just the same long-term trends we have been talking about or was there something new that happened there?

No. I think it's simply new, Karen. I think that a couple of the major players in the past year have taken their focus away from pricing and more towards the quality of experience. And have focused more on sanitation as part of that improving the quality of the customer experience. So as a result, even though sales of that industry may be slower, their purchases of sanitizing products have been strong.

And are we talking about QSR here or retail?

QSR.

QSR, okay. You mentioned you picked up some new chains. Can you share any of the names with us or no?

No. We don't mention customers.

Okay. Thanks.

Sure.

Your next question comes from John McNulty with Credit Suisse First Boston.

Hi, Mike.

How you doing?

Keeping busy, doing well. Couple quick questions for you. In the press release, you talked of cost savings as being one of the things you benefited from, and I was wondering if you can first of all kind of give us an idea of what kind of savings we're talking about and if they're temporary or just basically tied to some of the depressed markets that you're serving right now or if they're something we can expect to see going forward. And then also if you can give us some kind of clarity as to on a quantitative basis and what kind of savings we could expect on a going forward basis. I have a question on new accounts as well.

One thing we talked about was the restructuring actions and we outlined what those were and what we said before, that would have a favorable impact this year and on an ongoing basis it would be 11, 12 cents or so going forward. So I mean that's one action and that involved, you know, current reductions we have talked about, as well as closures in the key reductions. We had cost savings that we undertook year, which was part of the normal part of the business which as the business slowed down when 9-11 hit that we did all the various things that anybody does in any business, we reduced costs in trying to control costs. I don't think there's anything terribly dramatic in that. What the company does. So I think there are pretty straightforward in that respect. Not terribly unusual.

I mean, as far as incremental '03, in cost savings, it sounds like you're seeing a lot of the restructuring benefits now. I mean, do we expect to see anything improved in '03?

I mean, we have focused on a strong control cost. We have focused on that always. I don't think there's there any new programs we're going to have under way, but part of the culture of Ecolab.

Okay. And then as far as new accounts go, because obviously that looks like another relatively big driver for you this quarter. Can you give us a feel for what percent of that business would be considered major chain type business versus either regional or mom and pop type business, and can you give us a feel for the operating margin for both parts of the businesses is roughly equal to what you're seeing or have seen historically on average for the company?

Are you talking about Kay?

Yeah, Kay for the most part it seems.

So how much is regional and how much is national?

Exactly. How much is from national-type chains versus how much is from mom and pop individual or, you know, at least relatively small --

Okay. We have around two-thirds or so from national chains and the rest would be from regional chains.

And as of now, is the profitability for both of those roughly the same?

Yeah.

It is. Okay. That's all I'm looking for. Thanks a lot.

Thanks.

Our next question comes from Howard Rosencrans with HD Brous and Co.

Hi, thank you. I don't know if you said this in the call. I didn't necessarily hear it. You have a 3% -- I think you have about a 3% blended organic growth rate in the quarter, is that right?

Yeah. That's the volume growth X price, X acquisitions.

I -- okay. I backed into that, including price. You had 5% growth in your 4.6% growth in the base in the U.S. and had 5% in the other and you had 1% growth in international, and if you blend those three I get -- I get close to the three and I'm just curious what your guidance is for organic growth for Q4. And I'll leave you with my final question and let you go. Europe margin for '03, what are you baking into your guidance for '03 as the margin for Europe and what is your expected overall blended organic growth rate? Thank you.

Okay. Thanks. Well, first of all, I'm -- I can do this off line if you want, walk through all the numbers. What I can tell you is that our organic volume growth, excluding price and acquisition was 3%. Price was about a percent and then currency was 3%. So we can work off line if you want to give me a call back and you want to walk through those. Regarding the fourth quarter organic sales growth that's in our press release, we said 12% to 14% sales growth is what we'd expect. That's adjusted for acquisitions. Regarding 2003 margins for Henkel Eco, we haven't completed our plan yet so we don't have any specific numbers and secondly we haven't provided any specific guidance for 2003 other than to say that we felt that the 20303 estimates in general looked reasonable.

So the organic growth rate -- if you take out all the acquisitions in Q4 is 12-14 year to year?

12 to 14% is what we said we expected for sales in the fourth quarter. Adjusted for acquisitions.

So that's fully apples to apples organic number? I don't mean to harp on it. I apologize.

Yeah.

Okay. Thank you very much.

Your next question comes from Rosemarie Morbelli with Ingalls and Snyder.

Hi, Mike. Just following up on John's question regarding the cost control, did I understand your answer properly in that there is nothing that you have eliminated during this particular time frame because of the weak economy because of the concern with traveling and so on, and which will reappear when things are either calmer a --around the world.

Well the culture, we always maintain strong cost controls. Late last year, but going forward there's no specific new programs. I mean, Ecolab has always focus on cost every year. We're focused on how we can best deliver the lowest costs for the best results. That's nothing terribly new. We are moving ahead with the investments we need to make in the business. I think we're going to be in good shape going forward. We're not choking the business as we go forward. We're investing robustly I think it.

Okay. If you could clarify something in the press release and during the talk you talked about some of the actions taken include work force reduction, and you are increasing the sales force by 2% to 3% for the full year, which means quite a bit in the fourth quarter. Where are you cutting, not the sale force, or are you cutting some of the salespeople you are not satisfied with and replacing them by others?

There wasn't many people cut in the sales forces as part of the restructuring actions. You know, those have all been taken. In terms of the U.S. and head count reductions. And, you know, further, it's pretty typical for our head count additions that they do occur in the second half of the year. So this is -- I do not think this is atypical for us to make the bulk of the sales force additions in the second half.

So when you talk of the general head count reduction, we are talking about administrative type of personnel?

Primarily. But, you know, that's all been done.

No, no, I was just trying to clarify who was staying and who was going.

It was largely admin.

Okay. Then lastly, you said you are going to look at your discount rate and calculate the pension expense. What is current rate you are using at the moment?

7 1/2.

So it's not as high as a lot of people, which means that let's say you cut it by 1%, what difference does it make on your expenses?

I don't have a number in front of me Rosemarie, as to what happens to the expense. But, you know, that's a number that's pretty well guided by long-term interest rates so we have to see where they are at the end here. I don't think anybody is looking for a percent.

But you don't have a feel based upon what you're guided towards, you don't have a feel as to what it will do to the additional expense?

No, I don't have a number in front of me, Rosemarie. We can calculate that off line. You can probably calculate it yourself as well.

Probably not that's why I'm asking.

Give me a call then, because I don't have that number.

Okay. Thanks.

Your next question comes from Dmitry Silversteyn with Midwest Research.

Good afternoon, Mike and congratulations on a very solid quarter.

Thank you.

You talked about retention as a driver for some revenue increases in food and beverage specifically and Kay and a few others. How do I interpret that? Does that mean that you're getting some kind of a extra promotion to retain the businesses or why would retention of business drive revenue growth, I guess is what I'm asking?

Because you've got less going out the bottom of the bucket than out the top.

Okay. So your reduced business loss would be another way of saying that?

Yeah. What we have done is we focused heavily on food and beverage, where we talked of the account retention specifically. They have really geared up the service for the segment and focus on specific industries so they can provide even better service to the customers. And as you know, in our business, services is the real key for us. So they have done a great job of stepping that up and I think it's starting to show through in the account retention.

Okay. So in other words, you're kind of counting on losing a certain percentage of your business and you've been losing less?

I mean, there's always some turnover. At the end of the day, if you're satisfied with somebody's service, you're going to stick with that person.

Absolutely. All right, thanks.

The special charges in the fourth quarter, you know, is that going to be it, or are we going to see some more in 2003 or is the plan implemented and special charges done with in the fourth quarter?

That's it.

Great. Your cap ex has been dropping a bit in the last couple of quarters. Do you have any idea what you're spending in the fourth quarter or can you give us a number for the total year?

We have been saying it will be around 210 for the full year and I haven't seen anything to change that number.

So you're still looking for 20 the 10 for the full year?

That's still my best guess.

The manufacturers have nominated a $7 price increase for soda ash which is an important raw material for you. It will be decided in December some time, it hasn't come through. Do you have as a major consumer of the chemical, do you have a sense of whether or not that price increase will stick and what will you have to do to offset the material cost if it does?

I couldn't opine on whether it will stick or not, but as you know for our major raw materials, we tend to have contracted prices with the providers. That protect us from potential spot changes.

And these are annual contracts, are they not, as opposed to multiyear?

It can be annual or multiyear. Depends on the commodity.

Okay. All right. Well, thank you very much, Mike.

Thank you.

Your next question comes from Robert Ottenstein with Morgan Stanley.

Mike?

Yeah.

Just real quickly, what can you tell us on the new product side to give us confidence that that pipeline continues to be effective? I know there's very rarely any blockbusters, so it's kind of in a tough to track. But is there anything you can talk towards to give us a sense that that's still pretty robust?

I'm looking at list here of the product introductions here. It's probably about 30 different products, Robert, and they all vary in their impact. Again, we have at least half a dozen new products, Kay has half a dozen new products.

Can you talk about sales this year from those -- from new products as opposed to prior years or anything like that to give us, again, you know, a sense of how robust that's been?

I think that what we are seeing is something relatively typical in terms of our proportion to sales. I believe I'm reluctant to go much further than that. But terms of percentage of sales growth, I mean products represent.

How many of the 30 products are GS-system based?

Half dozen.

Half of them?

Half a dozen.

Oh, half a dozen.

That's where you're taking that technology and bringing it around to a couple of other divisions. I mean, for example, we mentioned even the bugle care division has solid technology now. Being brought into the healthcare market in the professional products like the cart wash. So we're bringing that across the board.

Thanks a lot, Mike.

Thank you.

You have a follow-up question from Chris Kapsch with Black Diamond Research.

Hey, Mike, earlier in the year you were gauging Ecolab's success in its stepped up targeting of the street accounts by tracking a sort of I guess a win ratio, vis-à-vis competitors in the street accounts and Ecolab was I think it was the first half of the year you're tracking two or three for each of the competitors. I was wondering if you're still looking at this and has the ratio been maintained?

Yeah. You know, we're looking at the ratio right now, it's about four to five to one.

Wow. And you had mentioned that the competitive activity in Europe I think was sort of unchanged or have you seen anything new in the activity domestically?

In the U.S.?

Right.

No. Pretty much the same.

Okay. Thanks.

Thank you.

Our next question comes from Bob Goldberg with New Vernon Associates.

I wanted to follow up on your comment about the pensions. Any contribution that you would make this year, would that be voluntary in nature?

Yeah. Yeah. Absolutely.

Is there a limit to the contribution you can make and still get a tax reduction? Is there a limit, -- do you happen to know what it might be if there is?

I don't have the number offhand, but it would be pretty big.

So you wouldn't expect to make -- whatever contribution you make would be moderate?

Correct.

Also on that subject R you also --

As tax deductible.

Yes. Okay. I would imagine so. Are you looking at the expected return on plan assets which I believe is 9.5%?

We've got nine.

You have nine now? So do you think that will be maintained for '03? You mentioned the discount rate, you're looking at the expected return as well?

Right. We have for over 13 years. We'll look at it like we do every year.

Okay.

I'm not in a position to say what we'll do because we have to wait for the year-end review.

One mathematical question. If I look at the your pro forma sales for the December quarter, 2001, I believe they're 770 million. Guide was for a 12 to 14% increase, so that gets you the midpoint of the range is that the it right way to look at it?

Right. If you look at the pro forma statements, we had 777, if you take 12 or 14% on that, you're going to end up in that range.

Great. Thanks, Mike.

Thank you.

We have a follow-up question from Mark Gulley with Banc of America.

No one has asked yet about option expense in 2003. Can you update us on your thoughts there?

You mean in terms of are we going to start expensing them?

Yes. If you did on a pro forma basis as you disclosed in your footnotes anyway, what could bit for this year and for next year?

Well, I think if you look it a, it's around this year in our annual report, it shows it around 6% of EPS.

That was last year, 2001?

Right. My guess is that's the same this year and next year. So I don't think the percentages are going to change much. In terms of our decision to expense, we have decided not to do anything until we get final rules out. The intent is to make companies truly comparable from one to the other and we're happy to start expensing but we want to do something when it's comparable and not confusing.

I understand. Thanks, Mike.

You have a follow-up question from Dimitry.

I was wondering, Mike, you mentioned Internet initiatives as part of your growth in Kay. Can you kind of expand on what the initiatives are and how your customers would take advantage of the Internet and what would mean for you in reduced cost or additional sales?

It's something we're looking at, so it's hard to be definitive about something you're looking at. But what it relates to is taking information at customer accounts on the usage of our products, et cetera, or from our service reports that we have been doing. We have been doing it for some is of our quick service accounts. We could throw in, you know, possibly some training, like this. So we're looking at some opportunities there and it's just part of our efforts to maintain our industry leadership in that area.

All right. I was just wondering if you could provide some color and you have, so thank you very much.

Thank you.

At this time, there are no further questions. Mr. Monahan are there any closing remarks?

No, ma'am. I'm sure you have other calls to get to. So thank you for your time and I'll be around this afternoon if you have any questions. Please give me a ring if you have any. Take care. Bye.

This concludes today's Ecolab third quarter earns conference call. --- 0