藝康 (ECL) 2003 Q1 法說會逐字稿

Good afternoon and thank you for standing by. All participants will be able to listen only until the question and answer session of the call. This conference is being recorded. If you have any objections, please disconnect at this time. I would like to introduce our conference leader for today’s call, Mr. Mike Monahan. Sir, you may begin.

Thank you. Hello, everyone. Thanks for joining us. This web cast teleconference will include estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Some of the factors that could cause actual results to differ are described in the section of our most recent form 10Q under the heading forward-looking statements and risk factors. In our first quarter, earnings release. A copy of our earnings release is available on Ecolab's website at Ecolab.com/investor.Now on to the numbers. First quarter earnings per share for ongoing operation s was 42cents hitting the top end of our previously stated outlook of 40 to 42 cents. This compared with 37 cents earned from ongoing operations on a pro forma basis last year.

We turned in a very good performance especially given the challenges and uncertainty in the world economies during the first quarter. Ecolab’s reported consolidated sales for the first quarter rose11%.Looking at the components, volume and mix were up 4%.Acquisitions were up 1%.Pricing was 1%.And currency was 5%.Sales for the U.S. cleaning andsanitizing operations were up6%.Acquisitions had no effect.U.S. institutional sales were up6% in the first quarter. This gain reflected continued aggressive new account salesefforts, successful new productsand the benefits of improved service initiatives to help offset the impact of uncertain markets. The food service market which represents the biggest part ofour sales continued to grow nicely despite recent reports of some softening in the market. Travel related areas were soft. Likely impacted by the economy and war-related concerns, which interrupted the otherwise good recovery from 2001's lows. Leveraging the market growth, institutional sales force focused its efforts, increasing calls on existing customers, and continuing its pursuit of new accounts, including the previously discussed efforts toward independent customers.

As well as an unrelenting effort towards change. Also, very good competitive gains and improved account penetration benefited sales. The division implemented a new service excellence plus program during the first quarter of 2003.This program includes specializing the sales service team into food service and health care hospitality. Insuring tighter geographic territories, and increased focused on service standards. Including a 100% customer callback program on all customer emergency service requests to ensure their satisfaction. Retention programs, and new product introductions like OasisPro are also doing well and there are more new products to come later in the year. We also achieved good productivity gains in the sales force. Looking ahead, second quarter sales should show steady gains for institutional, and we look for another solid performance from institutional in 2003. Kay domestic sales were up 13% in 2003's first quarter. Led by steady gains in QSR. While the QSR industry has been slow, Kay has outperformed it through a combination of new account growth, including developing fast casual restaurant chains, 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 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. We expect continued strong Momentum in Kay's second quarter and for the rest of 2003, as the division leverages new account activity in QSR, and fast casual as well as the food retail business. Textile sales decreased 6% following a strong fourth quarter 2002 and reflected weaker economic and competitive industry conditions. We continue to build on our enhanced service protocol, introduced in 2002. Which should provide long-term benefit and we are taking a selective approach to new contracts to ensure they meet profit guidelines.

However, the current difficult market conditions indicate near-term results are likely to be weak for this small business unit. Professional product sales increased 17%, as strong gains in janitorial and health care offset the continuing phase-out of the specialty business. Janitorial sales for the quarter rose double digits, as a significant win with an existing customer drove sales. Health care sales saw double digit growth in the first quarter, led by strong skin care and surgical instrument care sales. We finish the phasing out the noncore specialty business. 2002 was the year of repositioning for professional products, as it exited the noncore businesses. This year we expect to see continued growth from corporate accounts. The division will also bolster its results by continuing to work with its janitorial distribution network to attain stronger, steady growth.

New products will also be important. For example, Ecolab will introduce the first solid-based offering to the acute care market in the form of a solid surgical instrument cleaning product during the second quarter. Looking ahead, we expect a strong second quarter and good year for professional products in 2003. Water care sales were up 1% in the first quarter with modest growth in the hospitality, cruise, health care and laundry. Water care continues to follow the strategy focusing on sales to the cruise, food and beverage hospitality and institutional markets. New account gains in equipment sales across divisional Ecolab customers continued to the improvement. Sales are expected to grow modestly in the second quarter of 2003. Food and beverage sales rose 2% in the first quarter.

The focus on corporate account gains and account retention led the quarter and offset soft results in the agri and engineering markets. Soft drink and meat and poultry saw very good growth reflecting the strength of our corporate account relationships, expansion in independent bottlers, and key corporate customers adopting new products under the ecoshield food safety program. Food plant sales rose slightly. Dairy plant sales grew modestly as customers faced lower cheese pricing and demand. The agri business fell as it continued to suffer from sharply lower milk priceless and the resulting reduction in farm sanitizer purchases. designs and manufactures clean in place systems for food and beverage plans was also down as several key customers deferred capital purchases. Looking forward food and beverage will continue its aggressive new account and retention efforts. The new account volume should lead to improved growth in the second quarter, and for the full year of 2003.

Vehicle care sales were up 3% on the quarter. As the division offset an industry slowdown and apparently resulting from the weak economy. Vehicle care worked to offset the slower markets by adding more oil company business, where industry consolidation has actually benefited us as we pick up market share. Velocity 3600 has grown quickly and continues strong. Vehicle care's mid 2002 launch of the Harmony product line has been very successful, and Harmony has become our leading product line. A new product line for the soft-serve market is being developed and is planned to be rolled out in the second quarter. These new products, along with the focus on Key accounts, should enable vehicle care to show improving growth in 2003. Benefiting in part, as new investments in the conveyor market yield better growth later in the year. United States other service operations reported an increase of 4% in the quarter. Pest elimination sales grew 12% in the quarter.

Returning the division to its historic double digit growth trends. New contract sales continue to gain momentum. New programs like those for food retail are doing very well. And other new programs are being introduced this year. Pest elimination should continue to show steady double digit-type sales growth over the balance of the year. Sales for the GCS commercial kitchen equipment business decreased 6% in the quarter. This performance reflected the division's focus on bidding its standardized operating structures and the impact of the slower economy. GCS’s new management team has completed new standard operating procedures to give GCS a uniform approach across multiple acquisitions it made to create its national coverage. As an initial step the back office functions are being consolidated from the current 33 geographic businesses in a single call and administration center.

These changes will greatly improve customer service, reduce operating costs, and enable faster growth. It will also round out our internal upgrade efforts. The business has begun to reflect these internal improvements and with the service protocols and operations just about in place, we'll begin turning to build sales growth in the second half of 2003. International sales measured in fixed currencies increased 6%. Excluding acquisitions and divestitures, international sales in fixed currencies grew 3%. When measured in U.S. dollars, International sales excluding acquisitions and divestitures increased 17%. Reported sales in Europe increased 6% in the first quarter in fixed currencies, but rose 2% excluding acquisitions and divestitures.

Please note that effective with this quarter Ecolab's Africa and Middle East operations, which represent 1% of Ecolab's total sales, are being reported as part of the Europe's results. Europe's institutional sales increased 2%. As strong new account activity and new product launches worked to offset a weak hospitality business environment in Europe. European hospitality trends were soft in the latter part of the first quarter, and slipped more early in the second quarter due to further economic stagnation, and war concerns. It is estimated that American and European tourism is generally down over 10%. And seasonal travel is down as much as 30% in the Mediterranean. This is further compounded by the economic problems in major countries like Germany, which has been weak for several years.

However, institutional has responded to these 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 new product and sales initiatives to continue to benefit institutional sales growth in the second quarter, and partially offset the very weak industry conditions. The food and beverage business maintained its robust trends despite the flat and consolidating market, as sales rose 7%. Excluding acquisitions, sales increased a still healthy 4%. The division continues to benefit from concept selling. New accounts, and new products and technologies which have helped to offset lower beverage and volume results from Germany's tough new bottle recycling law that's hurt retail sales. The outlook for S&B remains good for 2003 as these continued programs lead sales. Reported professional product sales declined 28%.

However, adjusted for the UK distributor sales December 2002, sales were off 1%. Customer demand remains weak, and the market is very competitive due to slow economies in Europe, and cost cutting by end users. The division is introducing new products, like the PhaZer floor control system, and developing unique programs to address market segments and improve growth. The near-term sales outlook for professional products remains challenging. Health care sales rose 31%. Excluding acquisitions, sales rose 9%. The health care market in Europe is reflecting many of the same conditions as the U.S., with government cost controls and limited growth in the hospital area. The division is offset this with aggressive product introductions more product differentiation, increased use of market segments and opportunities in the small practice and nursing home markets.

The [inaudible] business acquired in December is performing well. Textile care sales increased 6%. The division leveraged new account gains and effective use Of water and energy conservation technology to accelerate corporate account gains. More new product sales are coming in 2003 and should help continue the good growth trends in textiles. Our European pest elimination acquisition is making good progress in its second full quarter with Ecolab. We're developing a program for the F&B market. Introducing incentive program to sell customer additional pest services, developing new contract sales efforts and rebranding the name to Ecolab, including vehicles, uniforms, logos and so forth. In addition, we are continuing to look for more pest elimination acquisitions in Europe, as well as other businesses to broaden our circle of customer strategy. Overall, we look for fixed currency sales growth in Europe's second quarter to be soft, as Ecolab Europe works to offset the war and economy-related drop off in the hospitality business through new products, focused selling, and cost controls.

Asia Pacific's first quarter sales increased 3% in local currencies. When reported in U.S. dollars, sales increased 14%. Excluding acquisitions and divestitures, fixed currency sales grew 5% with Japan, New Zealand, Northeast Asia, and Southeast Asia showing gains. Looking at the segments, institutional sales showed a strong increase. East Asia showed double digit growth in most countries. Sales growth improved in Japan due to both corporate and street accounts. Australia also showed solid growth, with good results in most market segments. Food and beverage sales were flat to last year. Japan showed modest growth over last year's Q1 sales. Australia's results were down, partially due to the sale of the hygiene services business and the drought. New Zealand sales showed continued strength as demand continues to be driven by exports. East Asia reported excellent growth with Korea, Taiwan, the Philippines, China, Singapore and Thailand all showing strong gains.

Regarding SARS, we have seen no discernible impact to date. In fact, we've seen a big increase in shipment less of disinfectants to the affected areas. We did make an adjustment to our Asia Pacific outlook to allow for potential effects and that adjustment is reflected in the earnings outlook as published in the press release. But also note that the bulk of our business in Asia Pacific is in Japan, Australia, and New Zealand. First quarter sales for Ecolab's Canadian operations increased 4% in local currencies. And were up 8% in U.S. dollars. Institutional sales measured in local currencies were strong, as the focus on new street accounts and expanded corporate account penetration yielded good growth. Food and beverage and professional product sales both rose slightly, buoyed by gains in the health care sector, net of rationalization janitorial offering. Laundry sales were off slightly in the quarter and the Kay business was strong reflecting the rollout of a large food retail customer.

Sales in Latin America were up 5% in local currencies, but decreased 11% when reported in U.S. dollars. It's worthwhile to note that excluding the impact of the strike in Venezuela, which literally shut down the business for the first two months of the quarter, Latin America sales grew 14% in fixed currencies. Results were up in all countries in the region with the exception of Venezuela, led by strong performances in Mexico, the Caribbean, Central America and Argentina. This was an outstanding performance in the region, given the challenging economies in Latin America, and the impact of political problems have in Venezuela. Our people worked extraordinarily hard to offset the impact of these difficult economies, and did a terrific job. Institutional had excellent 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 in national account sales. Food and beverage sales, excluding Venezuela also reported strong growth, capitalizing on the demand for strong sanitation driven by exports, as well as new programs for meat and poultry processors, the beverage market, and an expanded presence in poultry, agri and seafood. Pest elimination business continued their strong growth trends. Our associates in Latin America will continue to work hard in 2003 to offset currency swings as well as mixed economic and political conditions. We continue to expect solid growth in 2003. Turning to the expense side of the income statement the first quarter 2003 gross margin 50.8% compared to 2002 gross margin, excluding special charges of 50.3%.

The consolidated gross margin rose 50 basis points benefiting from the good sales gains, product mix improvements and cost reduction actions. Which more than offset investments we've made in dispensing and start-up equipment on the significant number of new accounts we took on in the quarter. SG&A expenses were 39.3% of net sales compared with 2002's margin of 38.8%. SG&A expense rose due to the impact of acquisitions, increased sales and service investments, and higher health care costs, as well as comparison to the year-ago period when costs were restrained in the weak economy. Operating income from our U.S. cleaning and sanitizing big rose 8%. Operating margins were up 20 basis points to 16.8%, reflecting new products, cost controls, and savings from last year's cost reduction actions. Operating income for the U.S. other services fell 31%. Pest elimination continued to show good profit growth while GCS reflected slower sales and growth investments in its infrastructure. On a constant currency basis international's operating income soared 20%. Excluding acquisitions and divestitures, international operating income increased an even stronger 33%.

As Europe, Asia Pacific, and Canadian margins rose. Profit gains were achieved through new products and cost controls. In U.S. dollars, and excluding acquisitions, international's operating income increased 51%. Ecolab's consolidated tax rate fell to 39.1% from 40.6%. Excluding restructuring charges from last year, the first quarter of 2002 tax rate was 39.9%. The 80 basis point decline in 2003 was primarily due to international mix and state tax reductions. Diluted shares outstanding were up 1% to 131.8 million shares. We report just 180,000 shares during the quarter. The net of this activity was diluted G.P.S. was 46 cents. This was a 56% increase over last year's reported income per share and a 14% increase over last year's 37 cents pro forme EPS from ongoing operations. Currency accounted for about two cents of diluted EPS in the first quarter of 2003. That's a review of the P&L.

In summary we're very pleased with our performance in the first quarter as improving sales growth and core market improvements enabled us to reach the top end of our forecast EPS range and post strong growth versus last year. Moving to the balance sheet our total debt to total capitalization ended the quarter at 38.0%, down from 38.9% at the end of 2002, and 44% a year ago. Depreciation was $55 million in the quarter, and amortization was $7 million. Capital spending for the quarter was $56 million. DSO was 61 days down 0.6 days from the first quarter of 2002 DOH was 32 days down about one day in fixed currencies from last year. That's a review of the first quarter. Looking ahead to the second quarter we begin by cautions 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, [inaudible] material corporate transactions that may be completed after the date of this release.

The business outlook section should be considered in conjunction with the information on the forward-looking statements in our press release which list factors that may cause results to differ. The second quarter will certainly face some head winds due to the recent month's weakened economic activity, currency fluctuations and potential travel related impact from SARS. However, we expect to more than offset these challenges and turn in good results for the quarter through continued good results from new account activity, new products, competitive gains, and improved operating trends in our businesses. We expect diluted earnings per share for the second quarter to be in the 48 to 52 cent range. This will compare with 46 cents earned in 2002's second quarter from ongoing operations, and net income per share of 40 cents. For the full year of 2003, Ecolab continues to expect growth in our major markets, including restaurants, health care, education, lodging, and food processing. We will take aggressive actions to exploit these trends and expect to deliver a very good growth.

Our institutional business should deliver a solid and improving performance over the balance of 2003. And Kay and pest elimination have strong momentum which should continue through the year. We look for improving trends in food and beverage, GCS and other businesses to bolster that growth. Further while Europe may be slow our Asia Pacific and Latin American businesses are doing well. We look for these trends to leverage improving markets and produce good gains over the balance of the year. Our ability to do well in the current tough environment and the new accounts we have gained, we think will make the second half produce strong growth. Further, we are carefully managing our costs in this environment. While at the same time continuing to make the strategic investments necessary to sustain our long-term growth. As a result, we continue to expect diluted earnings per share to increase 10% to 13% to the $2.05 area. We remain both confident and optimistic about our future.

I would also like to mention that Ecolab will once again host a tour of its booth for professional investors at the national restaurant association show in Chicago on Monday, May 19. Please call my office if you'd like to attend. That concludes my remarks. This conference call will available for replay on our website through May 2nd. Operator, please begin the question and answer period.

Thank you. At this time we are ready to begin the question and answer session. If you would like to ask a question, you may press star one. You will be announced prior to asking your question. To withdraw your question you may press star two. Once again, to ask your question please press star one. One moment, please. Our first question comes from David Begleiter from Deutsche Banc. Sir you may ask your question. Mr. Kevin Monroe of Thomas Wisele partners you may ask your question.

Good afternoon. Mike, I was wondering if you could clarify more me the cleaning and sanitizing business you had, you know, the growth seems to be kind of volatile. It was mid single digit for the bulk of '02 and then we had a strong quarter in the fourth quarter. Now it's kind of back down to that mid single digit range. So what's kind of going on there?

Well, I think, Kevin if you look at the fourth quarter, we were comparing against, you know the very weak fourth quarter 2001. And I think if you adjust the sales for that weak 2001, you'll see the institutional continuing to grow at about that same kind of 6% trend line. So, I don't think there's any big change from the fourth quarter other than that easy comparison that they had. Again, the business is growing at a pretty steady 6% which is, you know, in line with their six to eight percent long-term growth rate.

Okay. So do you expect that growth to kind of stay within that range? Or should we see an acceleration? Or are there some trends that would kind of work against you in that business?

I think it will probably be around there. Maybe a little bit better as the year goes on. Kind of depends on what happens with the economy, Kevin.

Okay. And also on the international operating margins, seems to me, I mean, if you could just clarify what they were. In your commentary you were talking about how operating income was up on the international side. But looks to me like the operating margin was about 7% versus north of 10% last year. If that's the case, what's the reason for that?

Operating margins for international last year were 6.3%.

Okay. I probably have it wrong. And what were they this quarter? 7%?

Yeah, 7.1.

Okay. So what's driving the improvement there?

Well, I think if you look at international you're getting first of all , the new products, the new accounts, you're getting some better scale out of the business. You know, we've worked very hard within that business to balance growth with profitability. And I think they've done a pretty good job there as they continue to expand those margins. And we've kind of said for international, informal target for us is to grow the margins maybe 50 basis point a year. So I don't think we're far off from that.

Okay. Thank you.

Our next question comes from David Begleiter of Deutsche Banc. You may ask your question.

Thank you. Mike,

Yes, sir.

Can you comment on European operating margins and profits in the quarter? And how they might trend during the course of the year?

Yeah, I mean we're happy to see European operated margins improve during the quarter. As you know we don't break them down by geographic region, But they improved during the quarter and we think that was very good news. And it's a result of the actions we've taken in Europe which include, you know, again to repeat kind of what I said about the rest of the world is, new products, attention to cost, greater incentives for people to get them focused in those areas on margins, and product profitability.

And you always mention in the calls improved accounts Penetration. You have any metrics within institutional to track how much of that account base is Penetrated by additional products, how much really gets the full penetration?

Well, we usually look at products per account for that , and that's a number that we track pretty closely, and we've seen continuing improvement in that as we go along.

And lastly, just on textile note the small business here, how much concern do you have over that business's trends last couple quarters?

Mr. Begleiter, this is me, Al. I've been telling you for the last ten years this is a defensive business. This business is not going to grow. It's a business to protect our on-premise laundry business which is doing extremely well, okay. Extremely well. And this is a business where they're just there for defensive purposes. You might as well forget it as far as a growth business is concerned in the U.S.

Thank you very much, Al.

Thank you.

I forgot to mention Al stopped in.

Our next question comes from Mr. Robert Ottenstein from Morgan Stanley Dean Witter.

I don't know whether to address this to Al or Mike. But, When do you think GCS is going to turn the corner and we start seeing some results there? And when actually -- let's just start with that.

We had to make a call this year. The new management asked that we consolidate their operations and rightfully so. It was a call because we had all these different operations doing their own thing, their own order entries, their own billing, their own credit and it was really bad news. So we're investing a lot of money to put together world class audit entry for GCS, and I think we're going to have a top flight operation, and our management has told us very frankly that we'll see this effort start to pay off in the third and fourth quarters of the year.

Just for perspective, you know, you look at pest elimination, it took several years as we built that. Pest elimination is a similar thing where we put together several acquisitions you need to get the protocols in place, get the service done and that's when it took off.

And we only had about seven in pest. How many do we have here Mike?

35. Allan Schuman: We have 35 -- so 35 Five acquisitions , about 35 different operations.

35 different operations. All doing their own thing. So we felt it had it had to be consolidated.

Al, you basically holding your guiding steady with what it was a number of months ago. But since then, you know, we've had the disruption of travel in Europe, because of Iraq. We've had SARS, we've had you know, all these reports of hotels at 20% occupancy in Asia. Are you guys just immune to this? You guys doing something different? Are you really that good or what are you missing here?

First of all, you hit it right there. We're really that good. But, all kidding aside, the travel portion is out of our numbers with regard. For in-flight caterers, you know last year, with September 11th, that thing went down the tubes, so it's out of our numbers as far as the travel per se on catering et cetera. Number two, okay, we think we're going to do well, you know, we're doing this with SARS, we're talking with the war going on, and we're doing okay right now. And now the war finished, okay, I think that you'll see an improvement. SARS, I hate to be cute here, but there's a lot more disinfectants and stuff used in hospitals than are used in hotels. Japan hasn't seen any effect, okay. Hong Kong operation, we have an entrepreneur guy there, who's increased two to three percent in the midst of this whole SARS epidemic. So we don't think -- we don't think it's going to have a major effect. And we put a little fudge in there when we put the number out there at 205 because we thought there might be a war. Okay.

So I think we're going to hold very true to our number. Very, very true, because we see some very good trends. The restaurant business is doing extremely well. The low-end hotels have not been affected. The only thing that's been affected to us is the top end hotels in major cities, and that is offset by many other things. So we hold true that our number, and I'm very confident that if we can do as well as we did the first quarter, and do it okay in the second quarter, then we're home free. For a very strong third and fourth quarter.

And you've got good data for April out of Asia?

Yeah.

Yeah, So far there's been no discernible impact to date.

All right, take my hat off to you guys.

Well, I mean, I don't like to say it's easy. But we're really working on this and as you know, we're pushing the living hell out of new business and we're getting a lot of business out there. So I mean, I don't want to be cute and say it's easy. But it's, you know, when we give you a number we're going to really make it happen.

Thanks a lot, Al.

Our next question comes from Gilbert Yang of Salomon Smith Barney. You may ask your question.

Good afternoon. Could you comment on, Mike, you mentioned that professional product had some product phase-out; could you give us the magnitude of how much business you decided to get out of there?

It was several million dollars of annual business.

Nothing terribly material?

No.

Not to Ecolab consolidated?

Okay, All right. And you talked a little bit about this tax rate, you know. Exactly maybe a little bit more detail as to why it was down, how sustainable that is, and how that might change if Europe begins to pick back up again. Does it actually start going back up?

No. We think it's pretty sustainable. We've said for a long time there's a lot of factors in there. One of them has been as our Asia Pacific business becomes move profitable as we noted over the last few quarters, et cetera, that that has an effect of lowering the rate because the countries in which you're not making money start to make money and that has an effect of lowering your rate. Second thing is, we've seen some rate reductions in Europe that have certainly helped. And then there have been some state reductions. And lastly, we've got a good tax department and they're taking advantage of all the available legal methods that we can to limit our taxes.

Are the European rate reductions related to sort of the taking over the joint venture where you can sort of more carefully plan your taxes better in those region? Or is that just actually rates coming down in Europe?

To some extent, yeah.

So sort of a tax planning sort of

Absolutely.

Okay. And then maybe a question for Al in Europe in terms of pest elimination. Could you give us an idea of, you know, what kind of time line we might expect for penetration of pest elimination into the continent? Because I guess you've already done the UK pest elimination foothold there.

What we're looking at two operations right now in Europe. I think you're going to see a very major business for us in the long run with pest elimination. I mean, we're really looking; we're doing real well with it. And our chains are really asking us. Now we're going to make a decision which ones to go after in Europe. And I say we have two that look very hot right now. And you know, you'll see some growth with pest in the forthcoming future. And especially in Europe, and very frankly, Japan is another area we're looking at with regard to pest elimination.

So we might hear something within -- by the end of the year we should hear?

Yes. I believe -- hope so.

Okay, and just along those lines, in your press release you commented that profits were up 20 -- operating income internationally was up 20%. But then when you take out acquisitions it was up 33%. As I understand those, the biggest acquisition in that area was the Terminix UK acquisition. Does that seem to imply that Terminix was diluteive?

No. That was removing acquisitions and [inaudible] We had business in Australia which we disposed of, that was a lower margin business. And in Europe, as well.

Okay so are the operating margins on Terminix similar to what they are in the U.S.?

Oh, no.

Or is it similar to the European --

No, that's a, -- when we acquired the business it was very low margin.

And we're changing their whole mind-set. You know, it's a good question you have, because when we took over in the states, pest control companies, and we converted them to pest elimination companies, which had much higher margins, we're doing the same thing with Terminix in England. And that's going to be whatever we take over in Europe, will be mostly pest control, as opposed to pest elimination.

Okay, So they're inherently lower margin.

Pest control is lower margin than pest elimination.

Right. But when we acquired Terminix, it had been going through a lot of changes. We clearly see that margins in Terminix will be substantially higher and we think in line with the entire U.S. business.

And how do you get the margins up? You start charging more or do you get rid of the lower margin?

We'll come and work on your house and charge big rates.

I've got a lot of bugs, too. I think you sent them over, Al.

No, actually , what we do is teach our guys to do a much better job than a pest control person and we get better results. And for that you got to pay for it. You know, you don't get anything for nothing. And that's -- and bugs is a big problem. So if you get rid of them, they'll pay for it.

It's creating the right programs to address the customer needs, pricing the programs properly, getting good efficiency and productivity out of your people. It's just a very basic business model.

Are you -adjusting any of the pieces for household?

Yes we are Without going into too much, because this is not exactly a quiet telecast, but we are looking at it. There's a couple of parts there that we know we're going to be working on.

Okay. Thank you very much.

Our next question comes from Mark Gulley of Bank of America. You may ask your question.

Good morning, guys. Good afternoon. Question on head count and investment. Towards the end of your presentation, Michael you mentioned the fact you're watching costs but also investing in the future. So typical question on head count. How will that be managed during the course of the year, particularly on the sales side?

We're continuing to invest, mark. Head count was up a percent for the quarter, and that's pretty much in line with what we said for the year, which will be up four to five percent organically. So I mean, this is a year in which despite the head winds that we've got we're continuing to invest in the head count and new products, et cetera. Mark Gulley Okay.

You know, we're going to do okay this year. We're going to do very well in that 205 range, but we think that the home market is going to open up even more so next year. And that really is the key for us. So why not invest and grow our sales force, come out with these new products, be very aggressive and really set us up big time for the future, as well as this year?

All right, great. Al, at the risk of getting too --

You haven't heard the question yet. Give us a little sneak preview of what you're going to be talking about at NRA in a couple of weeks.

We have some very good products coming out and one of the things that we really think is very hot, coming out with a new dishwashing system called Inferno for our low temperature

machines. I don't want to be too technical. But we have these low temperature business, and you can actually wash with, if you can wash with a little warmer water you can do a better job. So we're coming out with a low temperature hot machine if you can imagine that. Because we're able to handle the exhaust. Before to put a hot machine into a restaurant, you have to put a whole exaust system in and some people didn't want us to touch that. This machine comes with its own exhaust system, and the fluid is recycled back into the machine, okay. So you've just got to move in this machine with its exhaust system, take the old one out and you're in business. And I'll show it to you guys. It should be a very, very good opportunity for us.

Okay , Al. Thanks for that.

Our next question comes from Chris Catch of Black Diamond Research. You may ask your question.

You mentioned that new accounts were helping drive growth in the institutional business both domestically and in Europe. I'm wondering if you could talk about whether that was more accentuated in chain accounts or street accounts.

Well , you know our -- good question is while there's twofold. You know the restaurant business they're really growing. And they're ending a lot of accounts, and we're picking up those new accounts. But the real thrust, because that ones that we get with our chain program, but the real thrust is individual accounts in the marketplace. And we're getting it to our distributor network. You know, and that is working out quite well. And we're very, very aggressive, and we have all the distributor salesmen working with us. We have our operational overlord. Now there's a fourth cycle and a fifth cycle coming up. That's working quite well. Those are very high margin accounts. Ok Very high margin. And we're really pushing it to the limit right now. And we're very gung ho, and we're also -- we have our management meeting in -- coming up, and the thrust there is our numbers for the next five years , without going into it, we're pushing really pushing the file here, because we think there's huge opportunity out there for us, and we just got to get the guys motivated to go get it.

Al, just a follow-up on the blitz campaign for the distribution network.

Right.

Is that something that's exclusively done with Cisco or with all your distributors, or is there any level , as an incentive for these folks, is there any sort of discounting that takes place or is it just purely motivational gung ho sort of

We have similar programs with all our distributors , there’s no discounting js a matter of working with their sales. And remember, the distributor is making a little bit more margin on detergent than he makes on corn, peas and carrots. So he likes detergent sales and the cubic, the cube measurement of these cases are completely small. I mean on a case of beans, which is the same case, same size as a case of wetting agent, he'll make, you know, 15 times more profit on that. So he loves or she loves to buy our product and sell it quickly.

Thanks a lot.

Jeffrey Cianci of UBS Warburg you may ask your question.

Hey, Mike, question on the margins. Perhaps I missed. Surprised I missed since you were speaking so slowly in your presentation. But first the international point and a half or a little over a point margin again, was that all European cost reduction? What was the leverage internationally in the margin, first?

No, it was not just European. It was not just cost reduction. We had improved margins, and multiple areas of international.

But you had, you know, Terminix in there with lower margin pulling you the other way right?

Pardon?

The pest control in the mix was lower?

We more an offset that. We had good improvement in the gross margin. We had good improvement in Asia Pacific, in Europe. I mean across the board. And that was some cost savings the fact that we put in place good cost management. But it's also through new products and improved scale and all the other things we've mentioned earlier.

Okay. And then the other service margin again, was that all you know , the fixed spending and the infrastructures as you worded it was that a couple million dollars? Of extra spending? Why the profits were down so much in other U.S.?

Yeah, I mean, you're right. Tests showed good profit increase, and we were investing in GCS expense dollars in that infrastructure investment. So, they --

Sequentially , does that go away? I mean, I presume we're looking at another two or three -- one or two tough comparisons of the service profit. Mike Monahan? Right, We're saying we expect to be done with the investments in the first half and the second half will be focused on growth.

Okay. Great. And finally, just maybe a question for Al on acquisitions and such. There will be cash flow of 200, 300 million, maybe free cash flow this year. You don't like to do diluted deals. Your forecasts include no impact from acquisitions. What are the prices now? I mean everybody knows what you're trying to buy. I don't presume everybody's rolling over and playing dead and selling you these things at five times EBITDA. So Are these deals accretive, Diluteive, what are you willing do to? What's your religion on that?

Most of these things are family businesses. And if they don't want to accept our offer, we don't buy them. You know, it's as simple as that. There's nothing out there crucial enough, I mean there's nothing crucial out there, first to buy. We're looking for opportunities, in the future. So why screw this thing up? You know, if we think the thing is good and we give a fair offer and they accept it, fine. If they don't, they don't. Most of these businesses are family businesses right now. And it's timing, as well.

You won't accept dilution to do that?

I've never say we won't accept dilution. You never know. But we're not looking for dilution.

Right, right Okay, great. Thanks a lot.

Mr. Robert Goldberg of New Vernon Associates. You may ask your question.

Just a couple of questions. I noticed there was no specific items for revenue growth in the second quarter. And any fill ups on what we may be looking at?

I think we're looking probably in the eight to ten percent range.

Okay. So a little bit lower than the first quarter but still

You know, I think what we got to consider is Europe, a little bit. Because I don't think that's

Europe is going to be hot digty dodah, because with the war ending, I'm sure that Europe is, I know Italy is -- people, you know [inaudible]. So I think that we think eight to ten percent range is fine. And we'll offset Europe other places, as well.

How large is Germany in your European business? Is it the largest country?

About 30%.

30%. And as you know what the heck's going on in Germany is not exactly the best in the world.

My second question was that, in terms of the margin expansion that you're looking for in international and Europe in particular, how important is pricing to that? You mentioned you have to get these products in and price them appropriately. But is the competitive activity getting any tougher there so that pricing might be more difficult?

I don't think when we look at pricing it's the competitive pressure. It's the ability to price correctly on the use cost factor knowing what the customer wants and how it appeals to him. And also mixed management, as well. What to push and what not to push. You know, they were not part of Ecolab. They didn't think the way I'm talking to you, and it's a matter of teaching these people how to think that way and how to price. And that's -- you've got to price in the perception of the customer's head on what value that customer is getting for the product. And you price accordingly. And what happens is that the competition don't have that product usually follow suit. For a long period of time.

Is there any sense that you're making progress in that cultural change?

Yeah. I think we are making progress. But it's not an overnight deal. What's commonsense to me might not be commonsense to the next person, you know.

And also one detail question.

There was still a little bit of share creep I think from the fourth quarter to the first quarter. Are you going to step up the share repurchases as we go through the year to offset that?

Yeah.

Yeah.

Great. Thank you.

Rosemarie Morbelli of Ingalls and Synder. You may ask your question.

Good afternoon.

Hi, Rosemarie.

That was a good quarter considering that according to the ally no one is traveling anywhere and the hotels are quite empty.

You know something, that's okay accurate and not accurate. Because here in the states, our resort areas are filling up very well for the summer because people are taking their car and driving around the U.S. So I don't think the travel, to usit will help us a little bit in the U.S. in particular. Because I think Americans are going to stay home this year, per se, and we see some advanced registrations in these hotels and complexes that are doing work to our favor, and as travels on the highways, they'll stop at the restaurants, et cetera.

All right. So that explains your optimistic outlook for the second quarter, when we talk about these particular area ? Even if SARS gets in such a way that travel in Asia falls down to a stop, and even the Asians themselves don't move around by car?

They'll move around by push car and stop at the local egg roll place.

All right, So that doesn't make any difference in China?

That's right.

Only in China, though. Could you give us a better feel for your new service of excellence plus program? What are you doing there that you weren't doing before?

Yes, it's a program which one of the key focuses is to follow up on every emergency service request. In other words when a customer says they've got a problem, they call in. We send somebody out. We're going to call them back to make sure that they've had a satisfactory experience. We're going to keep going back there until they do.

And that's working very well. Nobody in our industry has that. I mean, you can imagine any time you've got a service person come to your home and having someone from headquarters call you up and say are you happy? Are you satisfied? Can we be of any help to you? That's working out very well.

Do you find as you are doing that that some of your sales force is actually not up to par and do you see a little more of

movement in and out of your people?

No. I think that's what -- I think what they're doing is probably doing a little better knowing that big brother is watching them.

Okay. Could you touch on vehicle care

volume was -- I mean revenues were down 3%. Is that mostly because of the state of the economy? And what are you doing in order to offset that?

Vehicle care is up 3%, not down 3%.

Oh, well again, I'll go back to Mike and his speedy talk. Which allows me to miss half of what he says.

I just try to be time efficient Rosemarie.

Yes, well maybe a little less efficiency in this case would be very helpful for the like of me.

Okay.

On the GCS side , the fact that revenues were off 6% and I hope I got that number right.

You're right.

Is that mostly because you were working on the consolidation and no one really was minding the store? Or did you purposely not mind the store? Or else was there another reason as the slow economy?

What did you have for breakfast? I mean, very frankly, this is the case. Right now it took a lot of -- they can't chew gum and walk at the same time, and they had to make a decision whether or not they do their consolidating as opposed to really going out full force for sales and what they're saying to me now, and we'll give you always the straight scoop, is that they said once they consolidated they'll be in a much better position to handle the customers better than they had even in the past. They have the economy of productivity, there's proper scheduling, better ways of answering the phone. We talk about service excellence right now. They're going to have their own service excellence. So that's what the management says they're going to do. They're going to have a profit notch organization. They wanted to have the first six months to get it done.

And Rosemarie, you can only juggle so many balls at one time. They're undertaking a huge change where they're taking out all the back offices of all of their locations and moving them back into one facility. So that's a big effort. Which takes a lot of focus.

No. I understand that. But I would have assumed that the people, the guys out there going out and selling as opposed to the management restructuring everything could have kept things flat, and therefore I was wondering if the economy actually had quite a large impact on that business.

To be very frank with you, Rosemarie, they get a lot of their loads from our institution division. And the institutional division is watching them refocus their energy, having a more efficient operation. And I think just as they do with pest, once they get settled down they're going to keep on feeding them the leads. I don't think they've funished them as many leads as they could have in the first few months.

We're all frustrated by the fact it's not growing faster. But I think we all have to recognize you have to be a little patient and let them get their protocols and places in line just like pest did and I think we'll be very happy with the results a couple years from now.

Well, it was not a question of being impatient, just trying to understand exactly what was happening.

Well, what happened is exactly what we told you.

And on the operating income side since pest was obviously up did they lose more than $2 million in the GCS and any chance that we will see the full amount back in 2004?

Pardon?

GCS must have lost more than $2 million in the quarter. And is that on an annualized basis , first of all , and then can they make it all up in 2004 when all of this consolidation is over?

I mean, yeah, indeed the cost of the infrastructure investments were in that range for the quarter. But that's not an annualize able number. I mean as we've said, we expect the bulk of our activity to be done in the first half. We expect improvement in the second quarter and for the rest of the year we expect much better improvement, performance on operating profit.

Since you have been working on that, you have a feel for how much you have actually spent, and therefore this is the amount of the recovery we should see at least at the onset?

I don't have those in front of me Rosemarie.

Okay. Thanks.

Our next question comes from George Kim of Search Light Capital.

Hi, Mike, could you just give us some ballpark estimates for what operating cash flow was this quarter and roughly how much you were spending on acquisitions?

Operating cash flow, cash flow from operations for the quarter was $60 million, And acquisition expenditures were about $21 million.

Okay, thank you.

Our next question comes from Dmitri Silversteyn of Long Bow Research.

Most of my questions have been asked but I would like to follow up. The professional products when you talk about exiting the noncore businesses you talk about several quarters and I think I detected you saying you're pretty much done with it and we should see a faster growth rate out of that group going forward?

Yeah, I mean we think we're done with it. Well we are done with that business in terms of a faster growth right a lot has been offset by the significant customer adds. So I don't think I'd look for an acceleration of the sales growth rate going forward.

Obviously not the acceleration of the 17% this quarter but if you look over the past three quarters, that growth rate should step up a little bit? Allan Schuman: Yeah the underlying growth rate you're absolutely right.

Okay. Water care business in this quarter was up about 1% point. That used to be a faster growing business for you. If I understand correctly that's kind of one of your areas of focus along with pest elimination. Can you give us a little bit of color of what's going on there?

It's a very small operation. We’re going to grow about two to three, four percent this year was one percent. We're looking for acquisitions. We're looking for acquisition in this area and we're not national water treatment. We know we have to be in water treatment for the foreseeable future. That's a business for the future. We're going to go get some acquisitions. Right now we're concentrating in the food and beverage area because that's a very good market for us. And it's right now it's an add-on. It's an add-on service it's not really too much of a stand-alone business right now until we get some acquisitions and make it national in scope.

As you know Dmitri for perspective it's less than 1% of our sales.

Right, So this is more of a longer-term opportunity?

It really is. And we think that water's here. The reason we're staying in it right now, because for the long range we'll be a player. But right now we're not. And I think over the balance of the year you're going to see better growth and we should see better performance for the year than you've seen in the first quarter.

Okay, very good. Is Asia still losing money for you on the ebb it line or have you got over the break-even line?

Asia's been very strong. In fact Dmitri Asia's been making money for us for about a decade I think.

I'm talking about-I'm sorry. Let me rephrase that. Is the profitability in Asia going to approximate in which you're getting in the rest of your international geographies?

No. We think that it will be better.

Better. We even make money in China. And you talk about SARS.

China's a very small part of our business. And yet we're making money in China as opposed to many companies who don't.

Longer term we think that Asia Pacific margins could approach the U.S.

Yeah.

they can be even higher than Europe and the rest of the world?

Oh, yeah.

Yeah.

Okay, very good. And finally, Al, excuse me, you talked about being you know, a little bit tough as far as next quarter's concerned with difficult comps and some head winds that you're hoping to overcome and you sounded very positive on the second half of 03. If you remember correctly, second half of 02 which was also a stronger period for you, what, given the tougher comps or what I consider to be tougher confidence in the second half , where is the confidence coming from? What are you doing right now to lead you to believe you're going to have such good results?

New business, We've got a lot of new business we're putting on. That's why we're pushing all these varied contests and sales growth, operation and such to get the guys out there to get the business. And there's business to be had. We have a lot of new products coming out in the end of the second quarter. We're putting out this new dish machine. Just a lot of new product. A lot of big new customers in Kay. A lot of big new customers in Kay. In pest , And food and beverage. In fact the food and beverage guys have put on a lot of stuff that haven't even – the equipment hasn't even been put on. So I'm giving it that thinking because of the customer base that we're picking up.

The good news Dmitri is business with new customers, it's more business with existing customers. It's really across the board. But there's been some significant additions in the last couple of quarters.

For example we picked up Albertsons and Hardees for Kay. In pest we got into Wal-Mart operations. I mean these are sizable hits. And we got things going in Sam’s. So I don't want to go through the whole litany without B.S.ing too much. That's what we're saying. We see our aggressive spread in the field right now.

Okay. Very good, Thank you very much. Congratulations on a solid quarter.

Thank you.

At this time, sir there are no further questions.

Thanks, everybody. We really appreciate your interest.

If there's any follow-up questions I'll be around this afternoon. Thank you.