藝康 (ECL) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Ecolab second quarter earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the 0. As a reminder, this conference is being recorded on Tuesday, July 22nd, 2003.

I would now like to turn the conference over to Mr. Mike Monahan with Ecolab. Please go ahead, sir.

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

This webcast teleconference will include estimates of future performance; these are forward looking statements and could differ materially from actual results. Some of the factors that could cause the actual results to differ are described in the seconds of our most recent Form 10-K under the heading statements and risk factors and in our second quarter earnings release. A copies of our earnings release is available on our website. As a reminder, all of our EPS and per share data have been adjusted for our recent 2 for 1 stock split.

Now on to the numbers, second quarter EPS was 25 cents, right in line with our projections and up 9% over last year's results from ongoing separation operations. We turned in a strong performance when faced with multiple challenges and uncertainty in the world economy during the second quarter. Our core domestic business recorded strong sales performances. International operations offset tough conditions to achieve good growth. At the same time they achieved excellent margin improvement in line with what we have forecasted before. These enabled us to produce strong earnings growth and widely outperform both our markets and the industry and gain market share.

We still made substantial investments in our future in terms of sales force training, GCS infrastructure, pest elimination and so forth. It was a tough environment, but Ecolab once again worked aggressively at all levels to outperform and post-attractive earnings results. We remain fully confident in our ability to grow EPS 10 to 13% for the full year 2003.

Ecolab's consolidated sales for the second quarter rose 13%. Looking at the components, volume and mix were up 4%, acquisitions were 1%, pricing was up 1% and currency was 7%. Sales for the U.S. cleaning and sanitizing operations increased 7%. Acquisitions had no effect.

U.S. institutional sales were up 7% in the quarter. This strong gain was the result of continued aggressive new account sales efforts, successful new products and the benefits of improved service initiatives to offset the impact of uncertain markets. The food service market, which represents the biggest part of our sales, continued to grow nicely. Travel-related areas showed improvement as the industry begins to recover from the effects of the economy and war-related concerns, which interrupted an otherwise good recovery from 2001's lows. Leveraging the market growth, institution and sales force remains focused, increasing calls on existing customers and continuing to pursue new accounts, including the previously discussed efforts towards independent customers as well as an unrelenting effort toward change.

Also, very good competitive gains and improved account penetration helped drive sales. The division continued to benefit from the new service excellence plus program implemented during the first quarter of 2003. This program includes specializing the sales service team into those with a food service focus and others with a healthcare and hospitality focus. This helps to insure tighter geographic territories and an increased focus on service standards. The service excellence plus program also includes a 100% customer call back program on all customer emergency service requests to ensure their satisfaction. The program has proven to be very successful showing improved customer satisfaction ratings, and more importantly, improved account retention.

New product introductions, like Oasis Pro 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 while investing in improved hiring and training practices.

Looking ahead, third quarter sales should show steady gains for institutional, and we look for another solid performance from institutional in 2003.

Kay domestic sales were up an outstanding 14% in 2003 second quarter led by steady gains in QSR. While the overall QSR industry has been slow, Kay has outperformed it through a combination of new account growth, including the broader QSR market and developing fast casual restaurant chains, better account penetration and more effective field sales coverage. Further, the food retail business continues to do very well, as rollouts continued with major grocers and new chains were signed up.

New products and programs also bolstered Kay's results. We expect continued strong sales in Kay's third quarter and for the rest of 2003 as the division leverages new account activity and QSR and fast casual as well as in the food retail business.

Textile care sales fell 10% and continue to reflect weak economic and very competitive industry conditions. We continue to build on our enhanced service protocol, introduced in 2002, which will provide long term benefits and are taking a selective approach to new contracts to ensure they meet profit guidelines. We're also planning new product extensions. These actions should lead to better long-term results in the coming quarters. However, the current difficult market conditions indicate that near term results are likely to remain challenging for the small business unit.

Professional product sales increased 20% as strong gains in janitorial and healthcare 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 continued to drive sales for another quarter. Healthcare sales also saw excellent double-digit growth in the second quarter led by strong skin care and surgical instrument care sales. Ecolab introduced its first solid based offering to the acute care market in the form of a solid surgical implementation during the second quarter and it has been met with strong success. We finished phasing out the non-core specialty business and we continue to focus on growing corporate accounts in the janitorial business. The division will also bolster its results by continuing to work with its janitorial distribution network to obtain stronger steady growth. The new products will continue to be important with more new products expected later this year.

Looking ahead, we expect a stronger third quarter and good year for professional products in 2003. Water care sales were off 1% in the second quarter with modest growth in the hospitality, cruise, institutional and laundry markets. However, these sales were offset by volume declines in food and beverage accounts. Sales trends are expected to improve in the third quarter. Food and beverage sales growth picked up in the second quarter, rising 4%. The focus on corporate account gains and account retention led the quarter and offset soft results in the agriculture and brewing markets. Soft drink, meat and poultry and food businesses all saw very good growth, reflecting the strengths of our corporate account relationships, expansion in independent bottlers and key corporate customers adopting new products under the EcoShield Food Safety Program.

Dairy plant sales grew modestly, even though our customers faced lower cheese prices and consumer demand. The agri business fell as it continued to suffer from sharply lower milk prices and resulting reduction in farm sanitizer 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 third quarter and for the full year 2003.

Vehicle care sales were up 4% in the quarter as the division used new account sales and new product gains to more than offset the soft economy and wet spring weather. Vehicle care has achieved strong penetration by all company accounts and is looking to expand its potential. Key to the strategy will be our corporate account sales team and key new products like Velocity 3600 and the Harmony product line, both of which continue to do well. The new product line for the self-serve market was introduced in the second quarter and received a good response. The new accounts, one in the first half of 2003, should help vehicle care improve its growth rate in the second half of the year. In addition, vehicle care will continue to leverage its new product gains and will focus on chain accounts. As a result, we look for our vehicle care to show improving growth in the second half of 2003.

United States other services operations reported a sales increase of 5% in the second quarter. Pest elimination sales continued strong, growing 12% in the second quarter, new contract sales once again led the growth. New programs, like those for food retail and QSR are doing very well, and other programs are being introduced this year. In addition, Ecoshare continues to show robust growth. We expect pest elimination should continue to show steady double-digit gains over the balance of the year.

In line with its first quarter results, sales for the GCS commercial kitchen equipment business decreased 5% in the quarter. This performance reflected our accelerated efforts to convert all branches to GCS's standardized operating model by the end of the June quarter as well as an impact on slower economy. GSCS's new standard branch operating procedures have been put in place. They are designed to provide a uniform approach across all branches. The back office functions have been consolidated from the 33 geographic businesses into a single call and administration center. These changes will greatly improve customer service, provide live operator response instead of voice menus, while we could have stretched these investments out over a longer period and not taken as big a hit to earnings, we felt this terrific and growing opportunity that we see at GCS compelled us to get the back office stuff done quickly so we could capitalize on it to help generalize future growth.

The business operations have begun to reflect these internal improvements, and with the uniform service protocols and operations in place, GCS has turned its focus to consolidating the internal changes and building sales moments up toward what we expect will be double-digit rates in the second half of 2004.

International faced a number of challenges in the quarter, but nonetheless performed well, taking advantage of sales opportunities and leveraging margins. Measured in fixed currencies, international sales increased 4%. Excluding acquisitions and divestitures, international sales and fixed currencies grew 2%. When measured in U.S. dollars, international sales excluding acquisitions and divestitures increased 19%. Reported sales in Europe increased 4% in the second quarter. Sales rose 1%, excluding acquisitions and divestitures.

Please note that Ecolab's Africa and Middle East operations, which represent approximately 1% of Ecolab's total sales, are now reported as part of Europe's results. Europe's institutional sales increased 1% as strong new account activity and new product launches worked to offset a very weak hospitality business environment. European hospitality trends were down due to continued economic stagnation and the impact of war concerns on tourism. American and European tourism is estimated to be down over 10%. Institutional 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.

New products, like Oasis Pro and Penguin, both products for the housekeeping area, also drove growth. We expect new products and sales initiatives to continue to benefit institutional sales growth in the third quarter and lead to modest sales improvement in the growth rate. Food and beverage sales rose 2%. Beverage consumption in Germany has been hard hit by the sluggish economy and new recycling deposit tax on cans which caused beer consumption to decline 9%. The division continues to focus on concept selling, and new accounts to offset the markets challenges. We expect to show better growth in the second half as these continued programs lead sales.

Reported professional product sales declined 30%. Adjusted for the U.K. distributor sale in December 2002, sales were off 2%. Customer demand remains weak and the market is very competitive due to the slow economies in Europe and cost cutting by end users. The division is introducing new products, like the Phazer Floor System, and developing unique programs to address market segments and improve growth. The near term sales outlook for professional products remains challenging. Healthcare sales rose 38%. Excluding acquisition, sales rose 3%. The healthcare market 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.

Further, healthcare systems have been stretching out payments to distributors, and some have gone bankrupt, causing significant market problems. The division has 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 Adams business acquired in December is performing well. Textile care sales increased 5%. The division leveraged new account gains and an effective use of water and energy conservation technology to accelerate corporate account gains. More new products are coming in 2003 and should help the good growth trends in textile care. Our European pest elimination acquisition is making good progress in its first full year with Ecolab. We branded the name to Ecolab.

In addition, we're developing a program for the F & B market, introducing an incentive program to sell customers additional pest services and are developing a more focused new contract sales effort. 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. We presently look for fixed currency sales growth in Europe's third quarter to improve slightly over the seconds as Ecolab Europe works to offset market challenges through new products, focused selling and cost controls.

Asia-Pacific's second quarter sales reflected the impact of SARS and our aggressive efforts to offset that. Sales in the region increased 3% in local currency. When reported in U.S. dollars, sales increased 13%. Excluding acquisitions and divestitures, fixed currency sales increased 2% with Japan, New Zealand and northeast Asia showing solid gains.

Looking at the segments, institutional rose nicely, performing extremely well given the effects of SARS. Southeast Asia was hurt by the SARS concerns, but we offset much of that through the very active efforts of our people to create new business and through the sales of disinfect ants. Business in southeast Asia is begins beginning to slowly recover, but will take a while. On the other hand, northeast Asia was very strong, rising double digits with double-digit gains in most countries. Hong Kong was also robust, increasing nicely in beating budget despite the tough challenge it faced. Sales growth remains strong in Japan, due to both corporation root and street accounts. Australia also showed solid growth with good gains in most market segments. Food and beverage sales grew modestly over the last year. Japan showed strong growth while Australia's results were down, in part due to the sale of the business. New Zealand sales slowed as the farm and dairy markets weakened, due to the drought condition. East Asia reported excellent growth with Korea, Taiwan, Philippines, Singapore and Thailand all showing strong gains.

As you can see, all of our associates' aggressive actions, we saw minimal net impact from SARS in the second quarter. We currently expect Asia-Pacific results to trends along the first half rates in the second half as concerns regarding SARS recede and the business returns toward prior levels. Second quarters sales in Ecolab's Canadian operations increased 6% in local currency and were up 15% in U.S. dollars. Institution and sales when measured in the National Hospitality Industry of the SARS outbreak in Canada. It focused on new street accounts, additional product sales to existing accounts and corporate account retention sustained in the business. Food and beverage rose nicely, and professional product sales were strong, buoyed by gains in the healthcare sector related to disinfectant sales to combat SARS. Lawn sales fell due to the impact of SARS on hospitality and healthcare accounts in the quarter and distributor changes. Sales in Latin America were up 5% in local currencies, but decreased 8% when reported in U.S. dollars.

Note that excluding the impact of Venezuela, where the unstable political situation continues to negatively impact the business Latin America's sales grew 8% 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 and Central America. This was an outstanding performance in the region given the challenging economies of Latin America and the impacts of political problems in Venezuela. Institutional had excellent growth as it leveraged market share gains and new account development. These results were also helped by continued good growth in food retail programs and national account sales. Food and beverage sales, excluding Venezuela, also reported good growth, capitalizing on the demand for improved sanitation, driven by exports, as well as new programs for meat and poultry processors, the beverage market and expanded presence in poultry, agri and seafood.

The pest' elimination business continued its tremendous growth trend in Latin America, recording another double-digit gain. Professional products also grew as an improved product line and changes in the sales force benefited growth. We will continue to work hard in 2003 to offset the currency swings, as well as the mixed political and economic conditions. And we expect solid fixed currency growth in 2003.

Turning to the expense side of the income statement, the second quarter 2003 gross margin was 50.7% compared to 2002's gross margin excluding special charges of 51%. The consolidated gross margin declined 30 basis points as the benefits of the sales gain, product mix improvements and cost reduction actions were offset by investments we made in dispensing and start-up equipment for the significant number of new accounts we took on in the quarter and higher raw material costs. SG&A expenses were 37.9% of net sales compared with 2002's margin of 37.6%. SG&A expense rose due to acquisitions, increased sales and service investments and higher healthcare costs. Operating income for the U.S. cleaning and sanitizing business rose 4%. Operating margins were off 50 basis points to 16.7% due to investments in the sales force development and higher operating costs. Operating income for U.S. other services fell 26%. Pest elimination continued to show good profit growth while GCS reflected slower sales and the accelerated growth in investments to complete the overhaul margins for other services should also improve sharply in the second half following completion of the investments at GCS.

On a constant currency basis, international's operating income rose 8%. All regions showed margin improvement as profit gains were achieved through new products and careful cost management. In the U.S. dollars and excluding acquisitions, International's operating income increased 24%.

Ecolab's consolidated tax rate fell to 38.7% from 40.4%, excluding restructuring charges from last year the second quarter of 2002 tax rate was 39.9%. A 120 basis point decline in 2003 was primarily due to lower rates and international mix. Diluted shares outstanding were up 1% to 265 million shares. We repurchased 3.8 million shares during the quarter. The net of this activity was that diluted EPS for the second quarter was 25 cents. This was a 25% increase over last year's reported net income per share and a 9% increase over last year's 23 cents for pro form an EPS from ongoing operations.

Now for a review of the P&L. In summary, we're very pleased with our performance in the second quarter. Given the many challenges we've faced around the world, we achieved strong sales growth from our core businesses, posted good international sales growth against tough conditions, realized excellent international margin improvement, grew our market share, and we continue to make significant investments in our future. It was a good performance, and we're very proud of our associates who made it happen.

Moving to the balance sheet, the weakening of the U.S. dollar had the general effect of increasing our assets and liabilities, including receivables, inventory and so forth. Our total debt to total capitalization ended the quarter at 35.8%, down from 38.9% at the end of 2002 and 41.9% a year ago. DSO in dollars was 62 days, up 1.7 days from the second quarter of 2002 due to currency. In fixed currencies, DSO declined 0.6 days. DOH was down two days from last year in fixed currencies.

Now to a review of the second quarter. Looking to the third quarter, we begin by cautioning that the following statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of business acquisitions or other material transactions that may be completed after the data is released. The business outlook section should be considered in conjunction with the information in forward-looking statements in our press release, which lists factors that may cause results to differ.

For the balance of 2003, Ecolab continues to expect improving growth in our major markets, including restaurants, healthcare, education and lodging and food processing. We're taking aggressive actions to exploit these developing trends and expect to deliver very good growth. Our institutional business should deliver a solid pore for man's over 2003's second half and Kay and pest elimination of strong moment up, which should continue for some time. We look for improving trends in F & B, GCS and other businesses in the second half to bolster that growth.

Further, we continue to expect to outperform our markets Europe, Asia-Pacific and Latin America and record good earnings results. We look for these trends to leverage generally improving markets and produce good gains over the balance of the year. With our ability to do well in the current tough environment and the new accounts we have gained, we think our future looks excellent.

Further, we are carefully managing our costs in this environment while at the same time continuing to make the strategic investments in people and new products and systems necessary to sustain our long-term growth. As a result, we expect diluted earnings per share from ongoing operations for the third quarter to be in the 30 to 32-cent range. This will compare with 28 cents earned in 2002's third quarter. Note that this projection for the third quarter is from ongoing operations and excludes the 2 to 3-cent per share gain we expect to record in the third quarter from the previously announced sale of our interest in Comak, a European janitorial equipment manufacturer. For the full year we continue to expect diluted earnings per share from ongoing operations to increase 10 to 13% over 2002's92 cents from ongoing operations. We remain both very confident and optimistic in our future.

Now, before closing I want to mention that Ecolab will hold a meeting for professional analysts on Tuesday, September 9th.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed by the 1 on your push button phone. If you'd like to decline from the polling process, please press the star followed by the 2. You'll here a three-tone prompt acknowledging your selection. Your questions will be polled q-and-a Ow first question comes from Robert Koort with Goldman Sachs.

Mike, I was wondering if you could elaborate a little bit more on the GCS spending profile? You had mentioned that it would be -- you'd be able to capitalize on all that infrastructure spend, and what you said was second half '04. I want to make sure you meant second half '03. And then in the quarter, can you give us some gauge how much that extra cost burden was so that we might anticipate what sort of margins you might have in the soak half of the year?

I did say second half of 2004. We've invested several million dollars in this quarter alone in GCS's infrastructure. We've got those investments behind us. And soap, what we'll be doing is leveraging that infrastructure with sales force actions over the coming quarters. So, I think we'll be building up to a double-digit rate in the second half of next year.

Okay. And then a second question. Typically you see a real nice seasonal margin bounce into the third quarter. But gauging your gross margin and SG&A expenditures, it doesn't sound like you're going to get the typical pickup. Is that a function of while things are pretty good, you're going to go ahead and spend to fund future growth?

It's certainly that, Bob. We are continuing to have ongoing investments in the infrastructure, the sales force training, et cetera. But we'll also be facing some headwinds, as you know, in the raw materials and certain cost areas. So, I think that's another factor that we're looking at in the third quarter, as well.

And a last question. Should I be worried about my son drinking milk? You mentioned prices are down since sanitizing chemicals are down. But I would assume volumes aren't down. So, why is there a relationship there to demand?

It all depends on whether you child's a newborn or not, Bob.

I've got one of each.

Well, if you're talking about the bottled milk, no, I don't think so. I think we're talking about on the farm, talking about sanitizers used on the cows. As that he auto more of a cow health than it is the quality of milk.

Okay. Thanks.

Thank you. Our next question comes from David -- with Deutsche Bank.

Thanks. Mike, on Kay, the 14% growth this quarter, one of the highest I ever remember, how sustain and is that growth in any one-time account gains ahead this quarter to boost it up?

there wasn't anything funny in the K numbers. That was straight sales growth. I think that when we've talked about K, we've talked about long-term growth in the 8 to 10% range, so we're clearly above the long-term norm for them. So, I think for the balance of the year we're still looking for double-digit growth, maybe not quite this high, but still not far from it.

And Mike, on your disinfectant sales in the quarter, how far how much would you view as one time due to SARS, if you could? And have all those sales returned to normal give than the waning of SARS fears?

I can't tell you how much was in disinfectants, but certainly those sales have started to return towards normal and we're starting to see some return from the hospitality markets towards normal. But I wouldn't say that neither of them are -- or any of them are back to where they were to begin with. I mean, I think it's going to take some time in the second half before we see the fundamental trends return to their for America levels. Overall, though, for Asia-Pacific we're looking for similar growth in the second half as we saw in the first.

And last question. On GCS spending, when does that begin to ratchet down?

June 30.

Thank you.

Our next question is from Mark Gulley

Mike, professional products up 20%, that's also a very good number and atypical for recent history. What's going on there?

Well, as we said, first of all, you've got the healthcare side, which is growing very well with the introduction of new products like the solids for surgical sterilization as well as the cart washing. Skin care line is doing very well. Those are growing double digits. But you also have significant customers that we were able to add in the janitorial sector, which is helping that peels of it.

If you exclude that one nice customer that came up or increased their take, what is a more normalized gain in professional products, then? Back down to kind of the mid single digits?

Yeah.

Now, with this new customer coming on-line, will that benefit results for the next, let's say, three quarters?

Well, no. We've experienced that for the last two quarters, so you've got another quarter.

Okay. On earnings comparisons, you said you were up two cents a share on a pro forma basis. But if I exclude currency and if I exclude the benefit of the tax rate, earnings per share on a pro forma basis are going to be about flat. Is my math right or am I missing something here?

I wouldn't argue with the math, but I think you're ignoring another half of the equation which is during the quarter we spent approaching a penny just on GCS. We've spent a bunch of money on dispensing equipment, et cetera, for the number of accounts that we added in the first half in the institution and pest elimination, some other areas. We've had an accelerated training and the redistricting et cetera, in the institutional area. So, there's been a lot of investment the first half that we bore that you don't see. So, -- I don't want to argue with your math, Mark, on that side. But I think you've got to look at the other side of the balance sheet, if you will, to see the investments we've made.

So, like your neighbor down the road, you've used currency to help pay for some investments?

Well, yeah. You might as well take advantage of what you can.

And lastly, when does the tax rate get back to a normal level, or does it in is this a new norm? j

what we said is it's lower rates and international mix. We expect that this rate is the ongoing rate. In fact, our objective is object Russly to improve our tax rate as we go forward.

Sure. Thanks, Mike.

Thank you.

Thank you. Our next question comes from Robert Ottenstein with Morgan Stanley. Please go ahead with your question, sir.

Hey, Mike, a couple of questions. Can you give us a sense of what SG&A was on a fixed currency basis?

I'm not sure I've got that number on a fixed currency basis. I may have to get back to you on that one, Robert.

Okay. Second question: do you have a sense of how the quarter progressed April, May, June? Did you get a pickup in June over the prior months? Were things kind of flowing steady? Just any kind of feel for that progression?

June was a good month. There was some sense of a mod et cetera I believe proved over April and May. But we don't really view monthly results as indicative of a whole lot here. It may have said something; it may not have. But clearly there was some pickup, some improvement there. And again, I think that's kind of consistent with what we saw about the U.S. economy, travel, et cetera. But again, I wouldn't read a whole lot into any month's results.

Okay. And then final question. Can you just talk to us a little bit about the operating margins in Europe proper, the old joint venture, you know, what they look like in the first quarter and whether there's an improvement in the second quarter and what the prospects are there?

I'm sorry. Could you repeat that, Robert? I couldn't hear part of it.

Can you talk about the margins in the European business, the old joint venture, not throwing in Africa and the Middle East, but the old business, if you have that, what the operating margin was in the first quarter and whether there was improvement in that in the second quarter?

Yeah, it improved in both periods. It was up about 10 basis points.

10 basis points in the seconds quarter over the first quarter?

No. I'm sorry. The improvement over the first quarter was quite sizeable. But I think you've got some different effects. I don't view thats a the right metric. We look at it on a year-over-year basis, Robertu and it was up, like I say, about 10 basis points in the second quarter. I don't think the first quarter is as material. And by the way, going back to your question on SG&A, excluding acquisitions in foreign currency, SG&A was up 4%.

Okay. And that 4%, how would that break out?

How would it break out?

Do you have a sense in terms of how much was training, sales force hires, any kind of further attributed to that 4%?

I don't have that detail here. j

okay. Thanks Mike.

Our next question comes from Dimitri Silversteyn open please go ahead.

Good morning. Or good afternoon, I should say. A couple of questions. First of all, speaking of the new sales hires that you mentioned in cleaning and sanitizing, how long does it typically take before they reach full productivity levels of some kind of the new established salespeople?

Well, generally on a sales~person we don't even turn them loose on their own really until about a year. And then I think it's probably like, you know, we would view even one of your associates, I mean, to the point where they're really productive and adding value might be two years or something till you turn the corner and start to go really additive. But I think that's pretty typical about anything. The first year we do a lot of training, turn them loose. The first year they're learning a lot, and then they start to become very productive.

And your accelerated training does not compress the time frame; it just gets them up to speed quicker?

Well, what do you mean by "accelerated training"?

Well, you talked about getting these guys in and I guess having them in the classrooms longer. I would ask you what you mean by accelerated training. j we weren't talking about accelerated. We were talking about enhanced.

enhanced training. Okay. j

this is for everybody. We've undertaken a great deal of training for new and obviously existing people in the sales force to try and enhance Hans their selling skills. I mean, this is something that we like other company do on an ongoing basis. We've just been doing a lot more of that over the last year or so because we want to make sure that our people are well trained to take advantage of the huge opportunities we've got within our existing markets.

Okay. Very good. What was the thinking behind the share repurchase? You bought almost 4 million shares during the quarter. Is this going to be an ongoing thing, or was this more of an opportunistic use of cash?

It was to neutralize shares.

Okay. So, this was just a dilution?

Yeah, exactly.

Okay. Very good.

And just back to that point, when we look at cash flows, we've always said our primary purposes are number 1, acquisitions, and then, number 2, share repurchase.

Fair enough. And a couple of bookkeeping questions. What was your DNA on cap ex in the quarter?

I don't have those in your opinion helps. The cash flow statements wasn't ready at the time of the release.

Okay. Fair enough. Thank you.

Our next question comes from Robert Goldberg with new Vernon associates. Please go with your question, sir.

Hi, Mike. Just a couple of follow-up questions. You mentioned some of the cost headwinds, raw materials and other costs. Any quantification, what are the key factors driving that?

Well, it's, you know, a lot of raw materials. I mean, as we've said before, no raw material represents more than 10% of our total. And secondly, we've also got contracts in place for these that limit the amount of the price increases on us. That said, I mean, it was things like caustic, plastic, things like that, like you're seeing with everybody else. That had an impact on us. Energy, fuel. I mean, its ice just a long list. There was nothing that was particularly strong in one area. Like I say, you look at our gross margins, they're only off 30 basis points. I don't think it was huge. We expect that we'll be able to get this back through pricing, but you can't make your pricing the minute you get the increase. So, we'll get it back later on.

Is healthcare a part of that,? I guess pension, as well, maybe?

Healthcare was a part of SG&A. Pension was not this year.

Okay. What is the year-over-year increase in the quarter for raw materials?

Well, we look at our raw material price increase and say it was up about 2.5%.

And one follow-up on the share repurchase. Do you have the dollar amount that was spent? Was it around $100 million or so?

Yeah, probably around that. It was about 3.8 million shares times a price of around 25 bucks. So, in that area.

This is related to options exercising, I imagine. Will that gonna be something that happens again in the second half? Are you gonna need to offset more options?

Well, no. And let mow step back and give you a broader answer to that question. As many of you know, there was a large number of option exercises in the month of May. And I'd like to explain for those who weren't aware of what happened there what happened. In February 1998 the board granted a limited number of executives a premium-priced option. At that time the stock on a post--split basis was around $14. The exercise price for those options was $26. And -- pardon me. $24.50. The stock did not reach the exercise price really until early this year. And then, because of the blackout period in the second quarter release, the only time executives could actually exercise the shares was in the first three weeks of May. So, that's why you saw a lot of these shares coming out because they were about to expire in three weeks. People made maybe a buck or two on the shares. In the a lot. But that's why you saw so many shares coming out at that time. Looking at the balance of the year, I don't think there's any large numbers. No bulges in terms of shares ex-pirg. So, I would not expect you would see as many shares being exercised by any means over the balance of the year. And therefore, I think our share repurchase would probably reflect that.

I appreciate the explanation. Thanks, Mike.

Our next can he comes from Kevin Monroe with Thomas white Zell partners.

Mike, if you could just give us a little color on what's driving the price improvement in the international business? I imagine you're dealing with some of the cost headwinds there, also. And do you think -- how high can operating margins get in International? Are they ever gonna look like what they do in the U.S.?

Well, first as to the goals on margins, what we've said is that we look for international, meaning Asia-Pacific, Latin America margins. We think those could certainly approach the U.S. levels. As far as Europe, we've said the 12 to 13% range of is kind of our goal for that. Clearly as the U.S. suffered a little bit this year due to some of the cost increases, Europe and Asia-Pacific benefited because of the weaker dollar. Most of these raw materials are priced in dollars. But puts, you certainly had on the operations, and most of all I think you had a lot of new products and improvements in that area, as well.

okay. And one more question. The -- there was a big increase in income taxes payable on the balance sheet from last quarter. What's driving that?

I'll have to look into that, Kevin. I don't have an answer.

Okay. Thank you.

Thank you. Our next question comes from Jeffrey Cianci with UBS Warburg. Please go with your question, sir.

Hey, Mike. Two quick things [inaudible] price costing. Pricing is up 1% and it sounds like if you blend it all, costs are up about 2%, right? You want to -- you get some pass-through going forward. Is it conceivable that we go from a sort of negative 1% hit to margin to a positive 1%? In other words, get pricing up another% percent ahead of costs? You see gross margin expansion.

Well, that's our objective.

Would you see it in the fourth quarter?

It depends on the timing in which we're able to get the pricing through as well as what happens with the cost going forward.

If you look at your guidance the rest of the year, it implies that fourth quarter has got to have some accelerated growth, right? I mean, we just have to get to your range and to get that fourth quarter growth, are you -- I'm wondering what the driving factor is. Is it that you're done with the accelerated investment by October, or is it that, you know, last year's fourth quarter you threw in a whole lot of expense for an easy comparison.

Well, I mean, you're right. Part of that is going to be certainly on the top line that we'll be picking up momentum in grCS where it's been a drag before. But looking at the other divisions, we're looking for not only a modest improvement, I think, in the markets that we're in, but more so that we've been building momentum with new accounts through a number of our divisions, which we'll -- which will start to build moments up, as you know, into the latter part of the year. We're also looking at more new being account gains as we go through the second half of the year, too.

There's nothing unusual in the year ago quarter we need to remember?

No, I don't think so, not in terms of the comparative gains. The other thing is looking at the earnings, Jeff, as you know, we're gonna remove one big source of expense starting July 1 with GCS. So, that's certainly going to help our margins. As well as, we've got a number of actions as we've talked about here with the pricing, et cetera, to help us in the second half, as well.

Okay. Great, Thanks.

Going back to Kevin's question, the reason for the taxes payable war mostly timing.

Thank you. Our next question comes from Frank Brunel with Adage Capital. Please go with your question.

I'm a little confused on the GCS. Did you say that cost you a penny last quarter, the spending?

It was close to it.

Are you capitalizing some of that stuff, too?

No.

So, it will be an expensed. And I guess there was -- at least earlier on, what SARS was doing in the headlines, people were saying this was good for you because people were cleaning more. Did you actually see any of that impact or --

Yeah. I mean, that's what offset the down turn in the hospitality. Some of the hotels, as you probably read in Hong Kong or Singapore were down to like 5% occupancies, and we had a substantial increase in disinfectant sales to offset that.

So, would you say it was a net neutral, the whole thing?

Yeah. Because if you just look at Asia-Pacific sales overall, they were up about 3% the first quarter, up about 3% in the seconds quarter. And we expect something similar in the second half.

Okay. Thanks.

Thank you. Ladies and gentlemen if there are any additional questions, please press the star followed by the 1 at this time. As a reminder, if you are using a speaker, you will need to lift the handset before pressing the numbers. One moment, please, for our next question.

Hey, Mike, with your strong free cash flow acquisitions have been an important source of top line and bottom line growth. but my sense is that you haven't done a whole lot let's say recently. Can you talk about when we might see a resumption of that effort?

Well, you know the M&A game, Mark. It's all when they drop. We're certainly being very active in the market place. We have not had any conscious reduction in our efforts. Basically we're still hurting deals, and it all depends on when they drop.

Any thoughts as to what products orgy graphic markets might drop in?

Well, we've been very public about saying we're looking for something in pest elimination in the couldn't not of Europe. I think pets elimination is very attractive around the globe, but that certainly is not to the exclusion of any other area of the company. We're still looking in existing areas throughout the company as well as looking for new areas. There's really nothing that's off the table, if you will

And then housekeepingwise, Dimitri asked this a little bit, cap ex for next year, 2004?

We didn't have a statement ready at the time of the release. We'll have it hopefully in the next week and it will certainly be in the 10-Q.

No, I meant nor next year, 2004, or for this year, what kind of investment do you need at this juncture to support growths?

In terms of cap ex?

Cap ex, yeah.

Well, we had forecasted around $240 m. this year. So, you know, I think that we'd be looking at a, you know, 5, 10% increase for next year.

Thanks.

But again, we haven't done any budgeting. So, that's probably just a ballpark.

Okay.

Thank you. Mr. Monahan, at this time we have no further questions. Please continue with any further remarks that you would like to make.

Well, thanks, everyone for participating today. I'm sure you have a lot to do, so I'll let you run. I'll be around this afternoon if you have any follow yum questions. Thank you very much.

Ladies and gentlemen, this concludes the Ecolab's second quarter Earnings Conference Call. If you'd like to listen to a replay of today's conference, please dial into 303-590-3000 using the access number of 544714. Once again, if you'd like to listen to a replay of today's conference, please dial 303-590-3000 using the access code of 544714. We thank you for your participation. You may now disconnect. And thank you for using AT&T teleconferencing.