藝康 (ECL) 2003 Q4 法說會逐字稿

Welcome to Ecolab's fourth-quarter conference call. This call is being recorded for replay purposes. Today's presentation will be in a listen-only format, and following the presentation there will be a Q&A session. Instructions will be given if you would like to ask a question at that time. I would now like to introduce the host of today's conference call, Mr. Mike Monahan. Sir, you may begin.

Hello, everyone, thanks for joining us. This webcast teleconference will include estimates of future performance. These are forward-looking statement and actual results could differ materially from those projected. Some of the factors that could cause actual results to differ are described in the section of our most recent form 10-Q under the heading Forward-looking Statements and Risk Factors and in our fourth-quarter earnings release. A copy of our earnings release is available on Ecolab's website at Ecolab.com/investor.

Now on to the numbers. Fourth-quarter diluted income per share was outstanding, as it rose 37 percent to 26 cents per share, beating the top of our expectation. This was an 18 percent increase from ongoing operation, when last year's special charges are excluded. We turned in a very strong earnings performance despite being faced with continuing challenges in the world economies during the fourth quarter. The business and margin strength were evident in the fourth quarter and were aided by favorable currency and lower tax rate as we beat the top end of our EPS forecast.

It was a tough sales environment, but Ecolab once again worked aggressively to outperform it and post strong earnings results; again showing the leverage that we can apply to our business. Our core domestic businesses recorded good income growth in the quarter. European operations offset tough conditions to achieve excellent margin gains, which were leveraged by favorable currency. And we made good progress to bring down our tax rate.

These excellent performances enabled us to produce strong earnings growth, widely outperforming both our markets and in the industry, and to gain marketshare. We remain confident in our ability to continue our EPS growth in the first quarter and produce another year of double-digit growth in 2004.

Turning to the details, Ecolab's consolidated sales for the fourth quarter rose 8 percent. Looking at the components, volume and mix were up 3 percent; acquisitions and divestitures were a negative 1 percent; pricing was up 1 percent; and currency was a positive 6 percent.

Sales for the U.S. Cleaning & Sanitizing operations increased 2 percent. Acquisitions had no affect. U.S. institutional sales rose 1 percent in the fourth quarter. Sales showed good strength in the restaurant area and steadily improving trends in travel. But a slowdown in distributor activity and continued soft sales in the government and employment-related contract feeding market affected results.

We continued to outpace the industry as we maintained our new account sales efforts and continued to roll out new products and improved our service levels. Efforts toward independent customers as well as our ongoing efforts toward change continue to offset slower sales by distributors and distributors' efforts to reduce inventories.

We continued our extensive field training and sales programs, new product initiatives, and corporate accounts efforts in the fourth quarter. And we continued to make good competitive gains and strengthened account relationships. New product introductions like Oasis Pro and the new line of leased disk (ph) machines are also doing well. We also achieve good productivity gains in the sales force while investing in improved hiring and training practices; and due to our optimism toward the new year beefed up the sales and service headcount by adding 30 people in the fourth quarter.

Looking ahead, improving trends in our core restaurant, lodging, and travel markets bode well for us in 2004. We will leverage these positive trends with the additional sales and service headcount and a slate of exciting new products to be introduced in the first half of 2004. These new products include an improved performance (technical difficulty) wear washing line, a new easy-to-use and high-performance kitchen floor product, and new technology that simplifies and improves results for on-premise laundries. We expect Institutional's first-quarter sales growth to show good improvement and gain momentum as 2004 unfolds and Institutional returns toward its trend line growth.

Kay sales were up 8 percent led by steady gains in supermarkets and specialty retail. The fourth-quarter sales gain was affected by some timing issues, and we expect double-digit growth to resume in the first quarter. 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 the developing fast casual restaurant chains, better account penetration, and more effective field sales coverage.

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 stronger sales growth in Kay's first quarter as the division leverages new account activity in QSR, fast casual, and food retail; as the new sales and service headcount added during 2003 bolsters selling efforts; and as developing new opportunities in movie theaters provide yet another attractive market for Kay's growth.

Textile care sales fell 12 percent and continued to reflect a soft economy, very competitive industry conditions, and our focus on improving account profitability. We continue our sales force training to build our enhanced service protocol introduced last year, and continue to take firm and selective approach to new contracts to ensure they meet our profit guidelines. Both are necessary for the long-term success of the business.

We are also planning new products like Oxy 120 and new product extensions. These actions are expected to lead to better profits and long-term prospects for the business. However, the current difficult market conditions indicate that near-term results are likely to remain challenging for this small business unit.

Professional products sales declined 7 percent. However, fourth-quarter sales reflected Ecolab's phase down of the janitorial equipment distribution and the specialty businesses. Adjusting for these, professional products' ongoing sales increased a very strong 16 percent for the quarter. Janitorial's ongoing sales rose at an outstanding double-digit rate for the quarter, as a significant win with an existing customer continued to drive sales for another quarter.

Healthcare sales also saw double-digit growth in the fourth quarter led by strong skin-care and surgical instrument care sales. Ecolab introduced the first solid based offering in the acute care market in the form of a solid surgical instrument cleaning product during the second quarter; and it has met with strong success.

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 attain a stronger steady growth. New product will continue to be important, with more new products expected later this year.

Looking ahead, we expect strong growth in the first quarter for both janitorial and the healthcare businesses. However, janitorial gains will continue to be more than offset by the effects of our exit from the specialty business last year, and by the exit from an equipment distribution business initiated in the second half of 2003.

We also want to inform you that in order to better focus on the growth prospects in each of these different markets, we have separated the janitorial and healthcare businesses into separate operations effective January 1. We will report them individually beginning with the first quarter of 2004.

Water care sales were up 7 percent in the fourth quarter with strong growth in all of our major markets. We saw continued growth in hospitality and commercial and institutional, and double-digit gains in the healthcare, laundry, and food and beverage market. We have named a new general manager from the water treatment industry to lead this business unit and will continue to emphasize the circle-the-customer strategy which should continue to produce good results in the first quarter and for the rest of the year.

Food and beverage sales increased 4 percent in the fourth quarter, led by gains in the dairy, food, meat, and poultry market. Dairy plant sales grew nicely, as increased volumes with existing accounts and new business drove sales. The food, soft drink, and meat and poultry businesses all saw good growth, reflecting the strength of our corporate account relationships.

We continue to benefit from an expansion in independent bottlers, and key corporate customers adopting new products under the EcoShield food safety program. The agri business was flat as the recovery in milk prices from historically low levels is benefiting prospects. Looking forward, food and beverage expects to make continued gains in the food-related markets, though that may be partially offset by soft equipment and agri results.

Vehicle care sales were up 1 percent in the quarter though profits improved substantially due to business restructuring and supply chain improvements. Vehicle care sales were affected by comparisons against the strong year-ago period and (technical difficulty) wet weather in the Northeast. Sales showed similar trends across all markets.

Key new products like Velocity 3600 and the Harmony product line continue to do well. A new product line for the selfserve market introduced in the second quarter continues to meet with a good reception. Vehicle care now has an offering for all carwash sectors. The business will introduce several new products in 2004 for the tunnel and detail market, and introduce a new generation of solid products. With its restructuring complete and upgrades to the sales force continuing, vehicle care will continue to leverage its new products and focus on chain accounts to drive improved sales growth and margins in 2004.

United States other service sales increased 4 percent in the fourth quarter. Pest Elimination sales continued to be very strong, growing 12 percent in the fourth quarter. New programs like those for the food retail and QSR industry are doing very well, and we are rolling out a comprehensive new program for full-service restaurants in 2004. In addition, EcoSure continues to show robust growth. We expect Pest Elimination to show continued good sales growth in the first quarter of 2004.

Sales for the GCS commercial kitchen equipment business decreased 8 percent in the quarter, a slightly smaller decline than the third quarter. While these sales results are still nowhere near where we want them, we are encouraged that we have begun to turn the corner on the core back office issues and believe we will see GCS results gradually improve through 2004.

As you may recall the first half of 2003 we began to consolidate the back office functions from the 33 branches into a single call and administration center. This center is designed to improve, -- to provide better customer service more efficiently, lower operating costs, and provide a platform for faster growth.

The center is now up and running; but in retrospect was transitioned too quickly. The second half of 2003 was hurt by operational issues related to starting up the new facility, centering around process and team organization, skills, and training; all of which resulted in call system routing inefficiencies. This in turn yielded lower tech productivity and therefore lost revenue. The effect of the lost sales along with corrective costs, like hiring more temporary people to hold up customer service levels, fell to the bottom line.

In the second half, we assigned a high-level cross-functional group to focus on the issues and solutions; and we have taken a number of actions to correct the issues. Also, Tom Handly, (ph) Ecolab's Executive Vice President for Specialty Businesses, has assumed oversight for GCS and its revitalization.

Based on the recent operating data, the changes have started to take effect in terms of customer service and operations. In fact, first-quarter sales look to be close to last year's. Thus, while we still have more to do, we believe the operations are moving in the right direction and we will begin remarketing the improved operations to customers and manufacturers in the first half of 2004. While the first half will continue to reflect the impact of this transition, we still believe GCS is building toward restored sales growth in the second half of 2004. This business continues to be attractive to us, since customers continue to tell us they need this service and there is no independent national service provider. Our opportunity in this market remains excellent and we're determined to fully and successfully develop it.

International faced a number of challenges in the quarter and performed extremely well, taking advantage of the sales opportunities and aggressively leveraging margins. Measured in fixed currencies international sales increased 2 percent. Excluding acquisitions and divestitures, international sales in fixed currencies grew 3 percent. When measured in U.S. dollars international sales excluding acquisitions and divestitures increased 17 percent.

Europe's sales at fixed rates were flat. Excluding acquisitions and divestitures European sales rose 2 percent in the fourth quarter. Europe's institutional sales were flat with last year as hospitality market conditions remained difficult and did not show much recovery in the fourth quarter. Weak economies in major markets like Germany, France, and Italy resulted in continued lower domestic consumption and compounded reduced travel trends. 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.

To drive growth in 2004, new products like the Barguard (ph) system for beer lines in bars will join recent housekeeping products like Oasis Pro and Penguin. We expect the new product and sales initiatives to continue to benefit institutional sales in the first quarter and to lead to a modest sales growth improvement.

Food and beverage sales rose 4 percent. Strong beverage sales were partially offset by soft food segment sales. Customer volumes remained low as sales of premium-type foods have suffered in the weak European economies. The division continues to focus on concept selling and new accounts to offset the market challenges. Also, the newest septic line of cleaning product is doing well, and the EcoChecks (ph) plant audit program for plant procedures is expected to do well. These should enable F&B to continue to show good growth in the first quarter.

Professional product sales, adjusted for the UK distributor divestiture in December 2002, were flat. 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 has introduced new products like the PhaZer floor system and is developing unique programs to address market segments and improve growth. The near-term sales outlook for professional products remains challenging.

Healthcare sales rose 30 percent. Excluding acquisitions sales rose 1 percent. The healthcare 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 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. We look for these to yield a pickup in healthcare sales growth in the first quarter.

Textile care sales increased 1 percent. The division leveraged new account gains and an effective use of water and energy conservation technology to accelerate corporate account gains and to offset consumption declines. More new products are coming in 2004 and should help continue to growth trends for textile care.

As you may have seen we recently closed on our second major European pest acquisition last month, as we bought a major French pest firm. The operations are now in the UK and France, and we will focus our near-term energies on integrating these organizations and developing service performance standards.

In the UK, the program for the F&B market is underway and seeing results. Longer-term we will continue to build our European Pest Elimination business through acquisitions and internal development, and apply the same strategy elsewhere in Europe as we broaden our business portfolio to our circle-the-customer strategy.

We presently look for fixed currency sales growth in Europe's first quarter to moderately improve over the second half of 2003's trend as Ecolab Europe works to offset market challenges through new products, focused selling, and cost control. We also continue to expect margins to improve again in the first quarter.

Asia-Pacific's fourth-quarter sales reflected aggressive efforts to offset the effects of the health and security concerns throughout the region. Sales in Asia-Pacific grew 6 percent in local currencies. When reported in U.S. dollars sales increased 20 percent. Looking at the segment, institutional sales growth was a solid 5 percent. Southeast Asia continued to be affected by SARS concerns. North East Asia sales were strong, with double-digit gains in several countries. The hospitality business is beginning to slowly recover. Japan has shown improvement following a slowdown in tourism and travel over the summer and has effectively used EcoTemp and Marketguard (ph) to win new sales. Australia and New Zealand both showed modest improvement.

Food and beverage sales showed good growth of 7 percent over last year. Japan produced excellent growth with strong sales of both chemicals and equipment. New Zealand sales recovered as the farm and dairy segments rebounded from the earlier drought conditions. East Asia reported excellent growth, with Korea, Taiwan, Philippines, China, Thailand, and Malaysia all showing strong gains. Avian flue is having an impact on our poultry plant operations in Southeast Asia; and Japan had a slow start to the first quarter. So we look for a flat comparison. However, we also look for improving sales trends as 2004 progresses for Asia-Pacific.

Fourth-quarter sales for Ecolab's Canadian operations increased modestly in local currency and were up 20 percent in U.S. dollars. Institutional sales measured in local currencies were up 2 percent, reflecting an improvement in the hospitality industry from weak summer tourism due to last year's SARS outbreak in Canada. The focus on new street accounts, additional product sales to existing accounts, and corporate account retention drove the business. Food and beverage sales were robust in the quarter due to new business and good account retention.

Sales in Latin America were up 6 percent in local currencies and increased 11 percent when reported in U.S. dollars. Results were up in nearly all countries in the region, led by strong performances in Central America and the Caribbean, with Chile, Brazil, and Mexico also delivering solid performances. This with another strong performance for the region given the challenging economies in Latin America and the impact of political problems in Venezuela.

Institutional posted strong growth as it leveraged marketshare gain and new account development. These results were also helped by continued good growth in food retail programs and national account sales. Food and beverage also recorded solid 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 an enhance 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 improved product line and changes in sales force benefited growth. We'll continue to work hard to offset mixed economic and political conditions in Latin America and expect to continue positive business momentum in the first quarter and full year 2004.

Turning to the expense side income statement, the fourth-quarter 2003 gross margin was 50.9 percent compared to 2002's gross margin, excluding special charges, of 49.9 percent. The consolidated gross margin increased 100 basis points due to the benefits from the improved business and product mix, and cost savings initiatives.

SG&A expenses were 39.0 percent of sales, compared with 2002's margin of 37.9 percent. SG&A expense rose due to cost savings initiatives and business mix being offset primarily by sales force and service investments, investments in GCS, and an expense for post-retirement death benefits.

Operating income for our U.S. Cleaning & Sanitizing business rose 6 percent. Operating margins rose 60 basis points to 15.2 percent as favorable business mix and efficiency improvements in several divisions offset investments in sales force development. Operating income for U.S. other services fell to 2 million from 8 million last year. Pest Elimination showed profit gains, while GCS reflected lower sales and the previously discussed issues related to the transition to the new administration center.

On a constant currency basis international's operating income rose 19 percent. Profit gains were led by Europe and were achieved through a better business and product mix and careful cost management. In U.S. dollars and excluding acquisitions and divestitures, International's operating income increased 31 percent.

Ecolab's fourth-quarter consolidated tax rate fell to 35.0 percent from 38.4 percent a year ago. The rate benefited from lower international rates, income mix, and tax savings efforts. The full-year tax rate for ongoing operations in 2003 was 38.0 percent, down 150 basis points from 2002. We expect our tax rate to decline again in 2004 by another 50 basis points due to ongoing savings programs.

Diluted shares outstanding were down 0 .7 percent to 261 million shares. We repurchased approximately 1.1 million shares during the quarter, bringing the total repurchased for the full-year 2003 to 8 million shares. The net of this activity was that diluted net income per share for the fourth quarter was 26 cents, up 37 percent over last year's reported net income per share, and up 18 percent over last year for ongoing operations.

That is a review of the P&L. In summary, we are very pleased with our margins and earnings performance in the fourth quarter given the many challenges we faced around the world. We achieved strong earnings gains from our domestic and especially our European businesses against tough conditions and grew our market share. It was a good performance and we're very proud of our associates who made it happen.

In looking at the balance sheet we begin by noting the significant effect of foreign currencies on various items. Specifically the euro's strength caused our European receivables, inventories, other assets, and debt to show large dollar increases and skew comparisons. For example, foreign exchange accounted for nearly 90 percent of the accounts receivable increase. With that background, Ecolab's total debt to total capitalization ended the quarter at 34.2 percent, down from 38.9 percent at the end of 2002. Depreciation was $49 million in the quarter; and amortization was 7 million.

Capital spending for the quarter was 63 million. DSO in fixed currencies was essentially flat with last year at 57 days. DOH was also essentially flat compared with last year in fixed currencies.

During the fourth quarter Ecolab made voluntary cash contributions totaling $75 million to its U.S. pension plan. These contributions, made from our strong free cash flow, combined with excellent investor returns from the plan assets for 2003 to bring our plan to a projected benefit obligation funding level of 98 percent at year-end 2003. Our discount rate at December 31, 2003, was lowered by 50 basis points to 6.25 percent; while our rate of return assumption was held at 9.0 percent. That's a review of the fourth quarter.

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

For the first quarter, our institutional and Kay businesses should deliver improved performances. Pest Elimination and healthcare should continue to sustain good momentum. Professional products is experiencing strong growth in its ongoing business, though the product line discontinuations will mask that progress in 2004.

We continue to expect to outperform our international markets and record good sales and earnings results. Furthermore, we expect continued good margin trends resulting from a better product mix and aggressive cost management. We'll continue to invest in our sales and service force in the first quarter, and in our businesses like GCS, to ensure that we have the people and the opportunities to sustain our growth into the future.

The current environment certainly has been tough, but we have continued to work hard to deliver our strong earnings results. With the economy showing signs of recovery, our markets posting encouraging signs, and our ability to leverage the array of economic challenges thrown our way, we think that our future continues to look excellent.

As a result, we expect diluted earnings per share for the first quarter to be in the 23 to 25 cent range. This will compare with EPS of 21 cents earned in 2003's first quarter. We look for the full-year diluted earnings per share to increase to the $1.14 to $1.17 range, representing a double-digit gain over 2003's $1.03 from ongoing operations. We remain both very confident and optimistic in our future.

I want to touch on the situation with Henkel. As you know we have a stand-still agreement with Henkel which among other things ensures an orderly process in the event Henkel might decide to dispose of any of our shares. This includes our right of first refusal for any Ecolab shares to be sold by Henkel. The agreement contains appropriate provisions to ensure an orderly public sale of any Ecolab shares should Henkel choose to sell.

As we said in December, we are well prepared to work with Henkel if Henkel decides to sell any Ecolab shares. Such a transaction might entail a repurchase by Ecolab and/or an underwritten public sale or private placement to ensure broad distribution. Further, under any repurchase scenario, we would be certain to retain the strong balance sheet we have in order to keep our flexibility for growth investments and acquisitions.

From our perspective there is nothing new to pass along regarding Henkel's stake in us since Henkel announced their Dial transaction. In terms of refining their plans to finance the Dial transaction, Henkel has not communicated to us anything other than what they have already said, that they are considering monetizing some of their Ecolab and/or Clorox holdings to help buy Dial. In any event, we went to make absolutely clear to Ecolab investors that we expect to work with Henkel as this moves forward, and that we have plenty of financial options available to ensure we protect all of our Ecolab shareholders and retain our financial firepower for growth investments.

A final thought. The combination of the so-called Henkel overhang currently depressing the shares, our improving end-market fundamentals, our recent demonstrated ability to leverage those, and internal operating and margin improvements expected in our various businesses during 2004 described on this call are making now a time that may prove a very attractive entry point for investors.

We have seen events like this before, where external factors, the Gang of Six, the Internet bubble, 9/11, competitive scares when Unilever and Johnson purchased Diversey, caused our stock to come under temporary pressure. Investors who took advantage of those events did well. As always you can count on us to do all we can to ensure we perform well for those invest in Ecolab.

That concludes my remarks. This conference call will be available for replay on our website through February 16. Operator, please begin the question-and-answer period.

(OPERATOR INSTRUCTIONS) Laurence Alexander, Deutsche Bank.

Question on the GCS, how much was the hit for all of 2003 because of the deterioration in performance?

Are you talking about the operating income line? It was around 15 million.

Do you still expect to have bounced back on the operating line in Q3 and Q4 of next year?

Of next year, 2004 or '05?

Of '04.

We expect a good improvement in operating income this year, particularly in the second half of 2004.

Thank you.

Jeff Zekauskas, J.P. Morgan.

I've got two questions. The first is I am puzzled as to why your earnings guidance for 2004 is so low. I mean all things being equal currencies probably helped you by a nickel this year; and the current the outlook should be more favorable for 2004. So if you take $1.03 and you add 5 cents which is a minimum, then you're only showing sort of 5 to 8 percent earnings growth. Shouldn't the guidance be much higher given the current state of currencies?

And the second question is what is your appetite for the repurchase of the Henkel holding?

Starting out with the first run, on the Henkel holding, what we have said is that we would, if Henkel was to offer the shares, which is still an if, we would probably be interested in acquiring some shares. Probably in line with the normal share repurchase that we undertake which has been roughly a 4 million share trend line type of thing. So it would be somewhere in that range.

If there were additional shares, then I think that if we were to purchase those we would look at reissuing those in an underwritten offering to get broad distribution.

In terms of the currency, first of all, the euro had a sharp increase in the second half of this year. So when we are looking at currency for next year, our average euro we're looking at is about 120 or so for the full year. So it's not that significant a change from where we are here today.

You expect your currency gain overall to be less next year? That is in 04?

Year on year, yes, we do.

Thanks very much.

John Roberts, Buckingham Research.

The mix improvement in the cleaning and sanitation operations in the U.S.; is that the fact that textile was down and you had the discontinued professional products; so those would be low margin areas going out?

Both of those businesses have low margins. And you're right, the overall sales was affected by the performances of those two divisions, which both had sales declines.

Secondly, I think you have got about $100 million in sales in U.S. professional products. As you split janitorial and healthcare, what is the rough split of that 100 million between those two?

I think it is about 50-50.

Thank you.

One thing I wanted to add is that, going back to GCS, as we look at 2004's trend, we expect to be approaching breakeven in the fourth quarter on an operating income basis for GCS. So we are very clearly looking for a substantial improvement out of GCS in 2004.

PJ Juvekar, Smith Barney.

If you look at your smaller ancillary businesses like professional products, textile, vehicle, GCS, can you compare margins for as in those businesses? For GCS you can take our your back office expense for this year.

Right, but in terms of all those they are certainly on the low end margins. For example GCS which has actually lost money in 2004. And the other ones are in the low single digit range right now. With that said, all of those business we think should be at double digit rates for their margins; and we fully intend to get there as we work through those businesses.

However, let me point out to you, the operating income level should be similar. Just like Kay, whose cases margins are far lower than institutional but have equivalent operating income. And that's what we are looking at.

You He talked about getting into movie theaters in 2004. When is that? I worried there. Are you going to dilute your sales effort by getting into these smaller lines of businesses?

We're already started in the movie theaters. We've got a deal with one large chain already and so we're starting our rollout to the movie theaters.

You don't dilute your efforts because it goes through a distributor. The goods are sold through a distributor. It only takes one guy to sell to a movie theater. So that is not -- you just added volume to -- and especially if you've gone to some of these new movie houses you can see the opportunity of them. It is not like the little old movie house around the block that you lived at when you were a kid. Now these complexes have 30 and 40 theaters and screens, and there's so many areas to clean it's a good potential for us.

PJ, as you may know, the beauty of going through Kay is that Kay is not have the same service intensity per account that, say, institutional would. It is an approach that's really geared toward the lower volume usage of a fast food or even in this case a movie theater. It is an appropriate structure. And as you know, with Kay we get very handsome margins with that business.

Just like picking up the SubWay chain which we did this last quarter, which is a heck of an account. They've got like, who the heck knows, 15,000 accounts, and they are not visited.

(inaudible) business in 4Q?

Yes, we did.

Finally on travel, the big accounts like Marriott and Starwood, what sort of growth are you seeing there, and what do you expect for '04?

we've seen is a pretty steady increase through 2003 in our travel-related business. I think that if you look at the reports coming out of those companies, they have seen increased bookings for the first half, for conferences and for rooms and travel. So they're looking at a much better rate.

If you look at the Smith travel data we've seen occupancies steadily rising through 2003 and expected to increase 3, 4 percent in 2004. So I think it's a very good outlook for the travel-related industry and we are seeing that starting to take off now.

Thank you.

Robert Koort, Goldman Sachs.

Mike, you were not speaking about the opportunity for better performance in your stock with Al in the room. That didn't pressure you, given its only 60 cents from its all-time high, did it?

Al? (inaudible) pressure? How could you think that?

On a serious note, you talked about seeing improving trends from the hospitality sector. Can you give me some sense? You mentioned that your institutional business was only up 1 percent in the fourth quarter. I think if you look at Starwood or Hilton they say much better growth.

So is it a function of those issues in the distribution and government, that business is sizable enough that the declines there offset your growth in the traditional hospitality customer base? Or is there some sort of lagging effect?

You are exactly right, Bob. If we look at our restaurant business, our restaurant business cruised along at a very nice rate. A mid single digits rate. And the travel related is showing a very steady improvement throughout the year as it has started to pick up.

But as you said, we've seen the catering business which is related to plants and offices et cetera, the luncheons like your lunchrooms, say at Goldman, as they cut back there's fewer people to feed, so that has affected that business. Secondly the government business was off as well post the Iraq buildup. (technical difficulty) As 2004 grew and as you know we have got a lot of business that we run through distributors. Those are the things that offset it.

So if you really look at the core areas of institutional, what you expect would be doing well, restaurants and lodging, are in fact doing well. It's been offset by some of these other areas.

How, they just now said this morning the employment rate is moving up, and with that the contract manufacturers should do better this coming year.

Mike, just to follow up on the distributors, I'm not quite as up to tune on what they're saying. But why, given that there is health overall in hospitality markets, why would they be seeing slower growth? And have you lost any significant customers there?

We have not lost any significant customers. In fact we are doing well with the distributor. They have a lot of inventories from last year. That's why you see us pick up in the latter part of the year, because their inventories are being depleted. But they are general comments. They are not regarding our inventories; it is regarding their entire inventory basis (inaudible). I think they had a lot of inventory on hand.

Bob, like any good company, as things got tight they tightened down their inventories and put the screws down on that. But also in terms of their unit growth sales it slowed down. I can't exactly tell you what happened with them. All I can tell you is what happened with their sales. I can't you the why; I can tell you the what.

Thank you.

Robert Ottenstein with Morgan Stanley Dean Witter.

Congratulations on a nice quarter; and Al, congratulations on your latest award.

Thank you, I appreciate it.

Mike, the post-retirement charge, where does that show up on the income statement? Is that SG&A?

Yes, sir, SG&A.

The entire amount?

Yes.

Can you give us a little bit more color on the sales force hiring and in what geographies and what divisions it came in?

For the fourth quarter or prospective?

Yes.

It was pretty much across the board. Institutional, like I said, had probably a little stronger in the fourth quarter. We added about 30 people there. I'm trying to look here.

That's a net amount?

Yes, absolutely.

Institution, Kay, and Puritan had nice increases (technical difficulty) new people.

Pest Elimination had a good increase as well. So it is kind of where you expect them to be. The core growth areas.

Do you plan on having any more of the blitzes with SYSCO? What is the status on that?

In fact, we just sent a list out of the blitzes for the year. We are going to have more and more blitzes this year. We were very successful in the last couple of years and we are going to even increase that blitz routine. What it really does is, the guys who do their work, it's just like you guys. There's the good guys and the bad guys. And here we have the guys, the blitz helps the lower end to make sure to go out there and sell more stuff. The top guys always sell. So the blitz forces the remaining part of the sales force to go out.

Al, in terms of Europe you were a little bit coy a year or so ago in terms of the amount of cost that you could take out of there, given that you had been running the business for a while. You have obviously done a terrific job, particularly in the second half of the year. How much more do you think there is to go in terms of improving the business there? Are we pretty much there in terms of the cost structure?

The cost structure, I think Were almost there. There will be a little bit more coming out there. Right now we are not really going to key in on the core structure in Europe as much as getting the sales and getting the bottom line. Getting the bottom line through sales. I think that's a very very important factor for us. That is OI margin is our key emphasis; and we are going to hit double digit. We hit double digit in '03 and we hope to enhance that in '04.

The other thing we have talked about is the product portfolio. Clearly we need to get more high-margin high-growth businesses, which we're starting with the Pest Elimination business. So we think we have got a lot of room to grow there. We have always said our objective is at least 12, 13 percent intermediate term.

But right now the thing we want to do is push them in the sales area. That is the key.

Would it be fair to say that there is more operating leverage in Europe than the U.S. because you don't have the same commission structure?

I think maybe; but I think what we're doing is we're enhancing the commission. We can't go overnight here without getting hurt, so we do it slowly. I think you will see more and more commission being added to the European market. And as we do that you'll see a different breed of guy being put on the payroll to get the sales that we need.

That takes time. But all things equal, I would think that more of a 5 percent gain in volume in Europe would have more go to the bottom line than in the U.S.

That's a heck of a question. I don't think I could really answer that right now. But I will tell you what. We will look at that. Mike, let's look at that and give Bob an answer on that. That's a good question. We'll check it out.

Kevin Monroe, Thomas Weisel Partners.

Good afternoon. A couple of questions. First back on the institutional side of the business. Is this distributor kind of inventory issue a couple months or a couple quarter issue? Do you expect this to correct itself? Or is this a long-term problem?

No. That's it right now.

We should start seeing this kind of alleviate as we move forward?

I think what you seeing is they are more just following improved business practices to enhance their inventory control. It's not like it is a sudden deal. It is more f a gradual good financial management kind of thing.

On the Kay side of the business, you said you expect it to rebound to double-digit growth going forward. What happened this quarter that caused it to shoot down there a little bit?

It was just timing of some sales activities is all.

On the margins on your other services, I guess GCS is what is impacting your operating margins there. When do you expect to turn the corner there?

On GCS?

In terms of the operating margins in the other services business, when do you expect that to start improving year-over-year instead of deteriorating?

If you're adding in Pest Elimination, I assume we would be looking at that about midyear or so. Because GCS itself should show improving OI results as 2004 progresses. And then you'll have that comparative effect. So I would think sometime around midyear you'd see --

We put a couple of sharp guys in there right now, so we have confidence they're going to turn the darn thing around. You might say, why the hell did we invest in this kind of money? Who needs it? But it is a hell of an operation. If we can get this thing working right, there will be nobody will have this kind of service organization in the U.S.; and that's really very important to the future of the whole industry. Because there is nobody to call on right now. And we're close now and by year end I think we will be in good shape.

One more question, more higher level. Does the Henkel issue in any way impact your ability to do acquisitions going forward? In terms of you might not want to do a sizable acquisition to keep the balance sheet healthier, in case you have to take down a good amount of shares? How do you balance that if you had a decent acquisition opportunity come up in the near term?

We've got a very strong balance sheet as it is. What we have said is if Henkel was to offer us some shares we would probably repurchase somewhere in the area of what we'd normally repurchase in a year. There would not be anything extraordinary.

Okay. Thank you.

Rosemarie Morbelli, Ingalls & Snyder.

Just going back to these other services, if I translate what you have both said it means that we probably would not earn a lot more than $2 million in the first quarter; and then it can go up a little in the second. And only in the second half do we start seeing the full profits from pest. Or do you think that your first and second quarter could be a lot higher than the fourth quarter of this year for one reason or another?

We should start to see that improvement in the second quarter.

By a lot, or just by a few hundred thousand?

It depends on what you mean by a lot. (multiple speakers) to show a steady gradual improvement.

With 1.8 million as a base?

1.8 million?

That was your operating income for other services in the fourth quarter.

We were talking year-over-year.

Right, but I'm looking now sequentially.

Modest in the first quarter and then second quarter you will see something more meaningful; maybe a couple million or so; and progressing from there.

All right. So slowly ramp up.

Yes.

You also said that you are going to separate janitorial and healthcare; and that those two are about 50 million; which leaves in professional products another 50 million. Can you remind us what is in the other part of the professional products? And are you separating it in order to eliminate that?

No. What we're saying is there's basically two parts to it. Janitorial and healthcare. We are going to split the two. I said they are roughly 50-50. Actually I think janitorial is probably about 60 and healthcare is about 40. That is all there is to it, though.

The reason we did it is, it's just like a cardiologist is a specialist, and the same thing holds (inaudible). They are two different types of individuals. I would venture to say that the hospital guy is more of a cardiologist type of salesman, and the janitorial guy is the regular internist.

And by really emphasizing the qualifications of both areas and keying in separately, I think we are going to grow the business better. We think there is a huge opportunity in the hospital nursing home business. So we are really putting a lot of effort in creating a real good size hospital division in the long term.

So you will still continue to sell the janitorial elsewhere.

Sure.

You also talked about the effect of SARS on your business. What about mad cow? Have you seen anything specific going on in the food and beverage, or do you see something coming in the future?

Unless there's a couple of mad cows floating around that we don't know about.

Well, we won't know until they start multiplying.

That's right. We cut that off already. All I can tell you is we don't think that is going to have a major effect for us.

We haven't seen any impact.

No impact at all.

You have not seen? Well, you did say that the meat part of your food and beverage was weak. I was wondering if that was one of the reasons.

Actually we said it was good.

It was good actually for us.

So I misunderstood. My problem. Lastly, you contributed 75 million also to your pension in '03. Any thought of contributing something next year?

We don't expect to. We are expecting very strong market returns driven by wonderful recommendations by analysts like you, Rosemarie.

Yes, of course. On that cheerful note, I will pass the line to someone else.

Dmitry Silversteyn, Longbow Research.

First of all I want to get back a little bit to the Kay margin issue. If I understood, Al, just basically want to make sure I understood you correctly. You said that margins in Kay were lower but the operating profit higher?

I didn't say that, I said that the gross margins are lower and (multiple speakers) always have been because different kind of business. But the operating income is similar to institutional.

I understand, so that was a gross margin, and (technical difficulty) rather than operating. Okay. That's fine. You continue to weed out the lower-margin business in professional products. How long is that going to last in 2004? Where are we going to lap that and start seeing apples-to-apples comparison?

Second half.

I think that what you are going to see from Ecolab in the next couple years (indiscernible) you know, we're not going to probably go with some businesses as long as we have in the past. Either they start doing some stuff and we'll make a decision. But as far as GCS is concerned, that's a good opportunity for us.

No, I don't disagree. Pest elimination in the UK, this was the first quarter where you really had the business in '02, so you could provide some growth comparisons year-over-year. You had talked about it qualitatively. Can you give some quantitative idea of how the business did in the fourth quarter since you've acquired it?

Are you talking about US pest elimination?

No, no, I'm talking about UK pest elimination.

What we saw in the third quarter is that we bought in early in the year, we had a lot of work to do to try and Ecolab it, get the logos and the uniforms and the procedures, etc. And in the third quarter, we started to see a turn in the business and we're starting to see sales prospects come along, so we think we're going to be doing well with UK. But again, remember that like when we buy anything, you've got to spend some time investing it to get the service where you want it. So the first year was really on that, and we think we have the sales prospects coming along.

What we're doing here is we're taking a pest control company and creating a pest elimination company, which has a hell of a better opportunity, and the contract sales I must tell you in England are okay. We're doing pretty good on contract sales, and that's very key for the future growth.

That's very good to hear. Finally, some clarification -- and maybe I misheard this correctly -- the growth in Canada was 20 percent in local currency and up slightly in dollars; is that --?

No, no, it was about up 1 percent, I think.

Up 1 percent in C$ or US$?

No, in C$.

So on a currency basis what would it have been?

That was constant currency.

Oh, you are using Canadian? Okay. Fair enough.

At U.S. rates it was up I think like 20 percent or something.

Got it. One final question, I know you are with SYSCAO as one of your distributors. Are you also with ServiceMaster?

ServiceMaster is not a food service distributor. No, it's not. (technical difficulty) Not a foodservice distributor.

That is it. Thanks.

Bob Goldberg, New Vernon Associates.

Mike, I want to follow up on your guidance for 2004. The question about why is it so conservative. That may be a function of the fact that you are reinvesting in the business a little bit more heavily this year and maybe you don't get a return on that either till later in '04 or into early '05?

I think we've got a pretty good earnings outlook. We are looking for double-digit growth. We've got $1.14 to 17 range. I think we're pretty optimistic about the year. As we're going through 2004, as we have said, we've got markets that are still in recovery. I think we are going to perform very well against those, like Europe for example.

The latest word out of Europe is, yes, we are getting some improvement in the travel and lodging, but the overall economies actually I've heard may be turning over again. That France unemployment is rising and the German economy is slowing. We still have some issues to combat. But nonetheless I think we are still looking for 11 to 14 percent EPS growth, which I think is pretty darn strong.

Which isn't chopped liver. And were also investing at the same time. So 11 to 14 percent is not a bad deal; with the possibility of who knows what?

Bob, the other thing is the exchange is not going to be -- we're not expecting it to be as favorable this year in 2004 as 2003.

You don't expect a nickel or so benefit; you expect less than that in '04. Just another couple of questions. What is the size of the business that you are walking away from or exiting in professional products? Seems like you are maybe doing the same thing in textile care.

It's about 10 to $15 million.

For professional products?

Yes.

How about in textile care? It sounds like you also may be walking away from (multiple speakers) .

That is account by account. What Were doing is reviewing all the accounts to see which ones are profitable for us, that we have good long-term with.

I want you also to always remember that there are two laundry businesses. One is the commercial business and one is the old on-premise laundry business which is in the institutional division; and we are doing extremely well with that. So there are two things; keep that in mind.

Lastly, on the pension issue, you have a discount rate coming down 50 basis points but you've made contributions in '03. Will there be any change in pension expense '03 to 04?

Nothing other than normal service cost; but not much.

Thank you.

John Roberts, Buckingham Research.

Just wanted to make sure I had this currency discussion complete here. In the quarter just reported it was about 2 cents. Could you just tell us what you are expecting in the first-quarter guidance and the full-year '04 guidance?

Just one second. I think for the full-year 2004 right now we are looking for about a penny out of currency for the full year.

Didn't you have just about 2 cents in the quarter you just reported? (multiple speakers) most of that in the first quarter alone?

But remember that the Euro strength is really in the second half of the year. When we look at the euro year-over-year, I think the average for 2003 was $1.13 and we are looking for maybe $1.20 out of 2004. So big change in the Euro.

I thought average first quarter to average first quarter would have been better than that.

Again, the big move was in '03 over '02. We are r not expecting it to be as big as '04 over '03.

Thank you.

John, if you're right and we have more currency than that (multiple speakers) --

I just wanted to know what you had baked into the guidance (multiple speakers) .

John McNulty with Credit Suisse First Boston.

First of all you've got some pretty strong cash flow coming in. Your balance sheet is basically down to the levels it was just before you the other half of the Henkel Ecolab assets. I am wondering at this point where we going to see your free cash go over the next year or so? I mean are there big assets out there that you could be buying? Or is it going to be a lot of one-off kind of pest control type assets, that type of thing going forward?

There are opportunities for us and we are looking at them right now.

In the acquisitions area, that is our number one focus is acquisitions. We think we've got a number of ideas and we hope you will be seeing something soon.

These will be of significant size, or are they going to be --

Remember, our mode of acquisition is maybe in the $30 million range. So I don't think you're going to see anything terribly large. But that's kind of our mode.

You never know. How's that?

Fair enough; you definitely never know. Another question, on the incentive comp side, you had started a program, I believe it was in the middle of the third quarter, about increasing incentive comp for some cross-selling. Have we started to see benefits at this point? If so what divisions were benefiting the most throughout the quarter on that? What can we expect maybe going forward?

We're just rolling that out right now, actually.

We didn't do that in the last quarter. We are just starting to roll it out.

Great. The last thing is, in terms of economic recovery and recovery in the leisure, I am just curious what you're actually looking for. Because if you back out the improvement you are going to get on the taxes in '04 versus '03, the earnings growth that you are looking for is somewhere in the neighborhood of 8 two 11 percent, which going into a recovery does sound a little bit on the low side. I am wondering if your assumptions just may be on the conservative side.

I hope they are. We are seeing the same numbers as everybody else on Smith travel research, restaurant traffic et cetera. We are looking for a pretty steady growth out of lodging; I think it is like a 3 percent type of room demand growth. And restaurants continued solid, 6, 7 percent growth.

Great, thanks a lot.

Robert Koort, Goldman Sachs.

Mike, I was wondering; your comment about only buying 4 million shares or so if Henkel offers them. You did 8 this year. And then secondly, obviously you have got a strong credit rating, good cash flow; wouldn't it make sense from an earnings standpoint and for your shareowners to do something more and use some 2 or 3 percent commercial paper? Not even that high. To buy in some shares? Doesn't it seem like you'd be sacrificing growth potential given the track record you have demonstrated.

First off, as far as the number of shares, remember that in 2003 we had an unusual year for some options. Those premium priced options that came due. So that increased it. What I am saying is our normal amount of shares that would come out through a normal option program would be about 4 million shares. That's just kind of a rough number. Remember we have not committed to any form of action. What we have said is this is the type of thing that you might expect from us.

The second thing is when we look over the next several years to reach our growth plan, acquisitions are going to play an important role for us and we see a lot of opportunity out there. So at this point we don't see the need or the propriety to actually buy in more shares. We think we need that cash for growth.

Al left it open-ended there with the you-never-know. But if you were just doing tens of millions deals and you have got a debt to capital of only 34 percent, again it just seems like you would have more room.

It is something we will keep thinking about.

We do have more room.

Thank you.

At this time I'll turn the conference call back over to our host, Mr. Monahan, for any closing remarks.

There are no closing remarks, but thanks everyone for your participation. Have a great day.

That concludes today's teleconference. Thank you all for participating and you may now disconnect.