藝康 (ECL) 2004 Q1 法說會逐字稿

Good afternoon and welcome to the Ecolab first quarter 2004 earnings release conference call. (OPERATOR INSTRUCTIONS). Now I'd like to turn the meeting over to Mr. Mike Monahan, Vice President, External Relations. Mr. Monahan, you may begin.

Thank you, and hello, everyone. Thanks for joining us. This Web cast telecast will improve estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected.Some of the factors that could cause actual results to differ are described in the section of our most recent Form 10-K and annual report under the heading, Forward Looking Statements and Risk Factors, and in our first quarter earnings release. A copy of our earnings release is available on Ecolab's Web site at Ecolab.com/investor.

Now, onto the numbers. The first quarter was a solid start to the year, as diluted net income per share rose 19% to 25 cents per share. Adjusting for a one-time charge for the disposal of business, EPS rose 24%. The strong earnings performance leveraged steadily improving margins during the first quarter, with better sales trends and continued margin strength from our U.S. and international businesses were bolstered by favorable currency and lower tax rates.

These excellent performances enabled us to once again outperform both our markets and the industry, and to gain market share. We remain confident in our ability to continue our double-digit EPS growth in the second quarter. Further, we raised our forecast for the full year 2004 to $1.17 to $1.19 per share, up 14% to 16% over 2003, representing yet another year of double-digit growth in 2004.

Turning to the details, Ecolab's consolidated sales for the first quarter rose 12%. Looking at the components, volume and mix were up 2%, acquisitions and divestitures were 2%, pricing was 1% and currency was 7%. Sales for the U.S. cleaning and sanitizing operations increased 3%. Excluding acquisitions, sales rose 2%. U.S. institutional sales rose 5% in the first quarter. Excluding the Daydots acquisition, institutional sales grew 3%.

Institutional sales trends improved in all areas for (ph) the fourth quarter rates, including restaurants, hospitality, healthcare, travel and government segments. We continued to outpace industry as we maintained our new account sales efforts, as well as our extensive field training and sales programs, new product initiatives and corporate accounts efforts. We also made good competitive gains, new product introductions, like Wash and Walk (ph), a new easy-to-use, high-performance kitchen floor product, and our improved line of wear (ph) washing detergents with espertech (ph), Orange Force, a citrus-based all-purpose cleaner, and Formula 1, a new on-premise laundry solution are doing very well and ahead are ahead of budget.

Looking ahead, improved trends in our core restaurant and lodging markets bode well for us in 2004. We are leveraging these positive trends with additional sales and service headcount and continuing the introduction of exciting new products. The recently acquired Daydots food safety products business has continued to perform as planned, and we are excited by our potential. We expect institutional sales growth rates to show good improvement in the second quarter and gain further momentum as 2004 unfolds, and as institutional returns toward its historical trend line growth.

Kay sales were up 12%, led by steady gains in QSR and food retail. Kay's strong performance was a result of new account growth, including the broader QSR market and the developing fast casual better restaurant trains, better account penetration and more effective field sales coverage. QSR performed well, with good results from the major and new fast food chains. The food retail business continues to do very well, and rollouts continued with the major grocers, and new changes (ph) signed up.

New products and programs also bolstered Kay's results. We expect strong trends to continue in Kay's second quarter, as the division leverages new account activity in QSR, fast casual and foot retail, and as developing new opportunities like movie theaters provide more attractive markets for Kay's growth. Textile care sales were down 6% in the quarter. However, we won a major new corporate account in the first quarter, and textile care will start to benefit from those new sales in the second quarter. Industry conditions remain competitive, and we remain focused on improving account profitability. Sales force improvements have benefited results, and we continue to take a firm and selective approach to new contracts to ensure they meet our profit guidelines.

And as a result of the new account gains, we look for the second quarter to show a modest sales increase. First quarter sales reflected Ecolab's phase down in 2004 of the janitorial equipment distribution business. Reported professional product sales declined 27%. Adjusting for the businesses we exited, professional products' ongoing sales increased modestly for the quarter, as the janitorial distributor business remains slow.

We continue to focus on growing our corporate accounts business in the janitorial market, with an emphasis on the retail, healthcare and building service contractor segments. New products will continue to be important, with more new products expected later this year. Looking ahead, we expect similar trends in janitorial's second quarter, as janitorial gains will continue to be more than offset by the effects of our exit from the equipment distribution business initiated in the second half of 2003.

Beginning in 2004, we separated our healthcare business from professional products. First quarter results for our new healthcare division reflected the discontinuation of a private label line we made for another company. Reported sales declined 4% versus last year. However, adjusting for that discontinued product line, healthcare sales enjoyed strong double-digit growth in the first quarter, led by strong skin care and surgical instrument care revenues.

Ecolab continues to benefit from the recently introduced solid-based surgical instrument cleaning product, which is meeting with strong success. Looking ahead, we expect further strong growth in the second quarter for the core healthcare business.

Water care enjoyed another good quarter, as sales were up 11% in the first quarter, with great growth in all of our major markets. Our cross-selling strategy with food and beverage, institutional and textile care continues to produce new account gains and healthy growth. With renewed division leadership, we are investing in headcount and training and will continue to emphasize the circle the customer strategy to produce good results in the second quarter and the rest of the year.

Food and beverage sales increased 3% in the first quarter, again led by gains in the dairy plant, food, meat and poultry markets. Dairy plant sales continued to grow nicely, as increased volumes of 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 corporate accounts adopting new products under the EcoShield food safety programs.

However, the agribusiness and engineering sales were both off if sales to those markets will remain weak. Looking forward, food and beverage expects to make continued gains in a food-related market, though that may be partially offset by soft equipment and agri results. The Ecocare sales declined 5% in the quarter. The Ecocare sales were affected by the severe winter weather in January. While business improved in the remaining months, and even though the division gained new accounts with no losses, it was not enough to offset the very tough start.

Ecocare will introduce several new products in 2004 for the tunnel and detail market and introduce a new generation of solid products. With its focus on securing new business and continuing to make upgrades to the sales force, Ecocare will leverage its new products and focus on chain accounts to drive sales growth and improve margins in 2004.

The United States other services sales increased 6% in the first quarter. Pest elimination sales continued to show their steady growth, rising 11% in the first quarter, as it compared against a strong period a year ago. Business remains solid for pest and continues to expand its offerings and markets. A new full-service restaurant program is being rolled out this month as pest continues to tailor programs for specific markets to enhance growth. Additional targeted new programs will be introduced later this year.

The EcoSure food safety audit business continues to show robust growth as it picks up new business with major chain accounts. We expect pest elimination to show continued good sales growth in the second quarter of 2004. As projected, results for the GCS commercial kitchen equipment business improved from the fourth quarter performance. Sales for GCS were off 1% in the first quarter versus last year. This was a significantly smaller decline than the fourth quarter, and indicates we are turning the corner on the back office issues.

More importantly, we cut the operating loss by about half from the fourth quarter. Recent operating data continues to show us that the changes implemented in the second half of 2003 have taken effect and resulted in improved customer service and operations. We believe we will continue to see GCS results gradually improve through 2004. Second quarter sales are expected to be flat to slightly positive compared to the prior year, and the loss should shrink further from both last year and the third quarter. While we know we still have more to do, we continue to believe the operations are moving in the right direction and this business continues to be attractive to us.

Customers continue to tell us that they need this service and there is no independent national service provider. Our opportunity in this market remains excellent, and we are determined to fully and successfully develop it. Measured in fixed currencies, international sales increased 6%. Excluding acquisitions and divestitures, international sales in fixed currencies grew 3%. When measured in U.S. dollars, international sales, excluding acquisitions and divestitures, increased 19%.

Europe, Africa and the Middle East sales rose 6% at fixed rates in the first quarter. Excluding acquisitions and divestitures, sales rose 3%. Europe's institutional sales rose 3% as the business works hard to offset continued sluggish hospitality and food service market conditions. This was particularly evident in major markets like Germany, France and Italy, where continued lower domestic consumption has compounded the effects of reduced travel trends.

Institutional's aggressive sales efforts generated strong new business growth in independent street (ph) accounts, especially in the United Kingdom and Spain, as well as picking up several new chains. To drive growth in 2004, new patented systems and products were introduced, like BarGuard (ph), the first-ever, fully automated on-premise beer line cleaning system for restaurants bars and hotels, and a new, innovative where (ph) washing line. These will join recently introduced housekeeping products like Oasis Pro and Penguin. We expect these initiatives and innovations to help boost institutional sales in the second quarter.

Food and beverage sales rose 2%. Customer volumes remained low, as sales of premium-type foods have suffered in the weak European economies, and a tough French agri market hurt sales. New aseptic bottle-filling cleaning products are doing well, and the Ecochecks (ph) plant audit program for plant procedures is expected to enjoy a good market reception. Further, we continued to develop the pharmaceutical market, and have seen good results there.

Professional product sales rose 2%. The division has introduced new products, like the Phaser (ph) floor system, and a new line (inaudible) mops. This is also developing unique programs to address other market segments and improve growth. However, the near term sales outlook for professional products remains challenging. Healthcare sales rose 7%. Excluding acquisitions, sales were flat. Healthcare reform in Europe has impacted this division, though the Adams acquisition has provided a great new line for growth.

Textile care sales decreased 3%. More new products are coming in 2004 and should help continue the growth trends in textile care. Our recently acquired European pest elimination businesses are continuing to make progress, and we are integrating these organizations and developing the right sales and service standards to generate consistent, long-term growth. In the U.K., the program for the F&B market is underway and seeing good results, as we introduce a market segment program for the catering market.

France is implementing new reporting and organizational changes to lay the foundation for growth. We presently look for fixed currency sales growth in Europe's second quarter to be similar to the first quarter, as the business works to offset market challenges through new products and focused selling. We also continue to expect margin expansion to continue in the second quarter. Asia Pacific's first quarter sales were flat when compared to last year in local currencies, as strong performances in north Asia and New Zealand offset the impact of avian flu on poultry operations in southeast Asia and weakness in Japan and Australia. When reported in U.S. dollars, sales increased 16%.

Looking at the segments, institutional sales showed growth of 1%. East Asia recorded strong sales with new customer gains helping to drive growth. China was strong, as new hotel openings benefited growth. Also, the (inaudible) program continues to help drive sales. However, as expected, Japan's sales declined following a very strong fourth quarter. Food and beverage sales were flat to last year. New Zealand's sales continued to show good growth in the farm and dairy market, and east Asia reported good growth. PET bottle cleaning has been strong, bolstering good conveyor lube sales.

The preemptive slaughter of chickens related to concerns around the avian flu outbreak, and a resultant decrease in volume at these poultry plants hurt our sales to poultry plants in southeast Asia. However, the impact from the avian flu is expected to be transitory, as new flocks of new animals are ready for processing. We look for improving sales trends as 2004 progresses for Asia Pacific, and expect good growth in the second quarter.

First quarter sales for Ecolab's Canadian operations were flat in local currencies, and up 18% in U.S. dollars. Institutional sales measured in local currencies rose modestly, reflecting an improvement in the hospitality industry. The focus on new street (ph) accounts, additional product sales to existing accounts and corporate account retention drove the business. Food and beverage sales were soft in the quarter, as new business and good account retention were offset by reduced equipment sales.

Sales in Latin America were up 12% in local currencies and increased 20% when reported in U.S. dollars. Results were led by a strong performance in the Caribbean, with Mexico and Brazil also delivering solid performances. The results were significantly affected by Venezuela's strong comparison to last year, when sales essentially vanished due to a countrywide strike. This was another strong performance for the region, given the challenged economies in Latin America and the impact of political problems in Venezuela. Strong growth was achieved by double-digit gains in institutional, food and beverage, and pest elimination. The strong results in institutional were driven by expanding resort development, continued success with food retail programs, and a strong tourism market in the Caribbean and Central America.

Food and beverage results were positively impacted by Venezuela's comparison to last year, and through leverage of new beverage and brewery lubrication (ph) and CIP programs. Pest elimination continued its strong growth in Latin America, recording another double-digit gain for the quarter, as excellent growth is driven by continued successful execution of the circle the customer strategy and through geographic expansion.

We expect to continue the positive business momentum in Latin America over the remainder of 2004. You have likely seen that we sold the Facilitec grease management business a few weeks ago. Though a good business, it turned out to be a fire safety business, and one did that not fit our premium, value-added service model. Also, unlike pest and GCS, we also felt it was not a business in which we could sufficiently differentiate to attain our growth and profit standards.

Turning to the expense side of the income statement, the first quarter of 2004 gross margin was 51.6%, compared to last year's 50.8%. The 80 basis point increase was due to the benefits of the improved product mix in business and cost savings initiative. SG&A expenses were 39.3% of sales, flat with last year. Operating income for our U.S. cleaning and sanitizing business rose 11%. Operating margins

... SG&A expenses were 39.3% of sales, flat with last year.

Operating income from our U.S. cleaning and sanitizing business rose 11%. Operating margins increased 110 basis points to 17.9% as favorable business mix and cost efficiency improvements in several divisions offset investment in sales force development and the effects of the Daydot (ph) acquisition.

Operating income for U.S. other services increased 43%. Results included a $1.5 million patent settlement. Pest elimination showed good profit gains and, as expected, the loss of GCS declined sharply from the fourth quarter.

On a constant currency basis, international operating income rose 14%. Operating margins increased 60 basis points to 8.0%. Profits were led by Europe and Latin America and were achieved through higher sales and careful cost management.

In U.S. dollar and excluding acquisitions and divestitures, international's operating income increased 5%. Ecolab's first quarter consolidated tax rate fell to 37.1% from 39.1% a year ago. Excluding the effect of the Facilitec sale, the first quarter tax rate was 37.2%. The rate benefitted from low international sales and tax saving efforts.

Diluted shares outstanding were down 1.3% to 260 million shares. We repurchased 1.3 million shares during the quarter. The net of this activity was that diluted net income per share for the first quarter was 25 cents, up 19% over last year's reported net income per share.

That's a review of the P&L. In summary, we are very pleased with our margins and earnings performance in the first quarter. We enjoyed good gains from both our domestic and international operations and continue to grow our market share. It was a great performance and we are very proud of the associates who made it happen.

Looking at the balance sheet we begin by noting the significant effect of foreign currencies and acquisitions on various items. For example, foreign exchange and acquisitions accounted for over 70% of the accounts receivable increase. With background, Ecolab's total debt to total capitalization ended the quarter at 37%, up from 34% at the end of 2003 and reflected the first quarter's more active acquisition activity.

Depreciation was 53 million in the quarter and amortization was 8 million. Capital spending for the quarter was 68 million. DSO and fixed currencies was essentially flat with a year ago and DOH was down compared with last year in fixed currencies.

That's a review of the first quarter. Looking ahead to the second 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, divestitures or other material corporate transactions that may be completed after the day of this release.

The business outlook section should be considered in conjunction with information on a forward-looking statements in our press release and periodic reports which list factors that may cause results to differ.

For the second quarter our institutional business is expected to deliver an improved performance. We look for Kay (ph), pest elimination, health care and water care to continue to sustain a good momentum. Professional Products is building its ongoing businesses though product line discontinuations will mask that progress in reported sales through most of 2004.

Other businesses like GCS and Textile Care are expected to see improving trends in their sales and profit results. We continue to expect to outperform our sluggish international market and record good sales and earnings results.

Further, we expect continued good margin performances resulting from better product mix and aggressive cost management. We will continue to invest in our sales and service force in the second quarter and in our businesses like GCS to ensure we have the people and the opportunities to sustain our growth into the future.

The current environment is improving and we continue to work hard to deliver our strong earnings results. We think our future continues to look excellent. As a result, we expect diluted earnings per share for the second quarter to be in the 28 to 30 cent range. This will represent a strong gain over 25 cents earned in 2003 second quarter.

Given the strong first quarter start, our good margin trends and the steadily improving markets we have raised our full year diluted earnings per share outlook to the $1.17 to $1.19 range, representing a 14% to 16% gain over 2003's $1.03 from ongoing operations.

We remain both very confident and optimistic in our future. With that said, we also want to caution people against getting too aggressive on our 2004 full year earnings outlook. The year is still early and the second half will compare against this period last year, which enjoyed the benefits of a weakening dollar and comparatively lower tax rate.

Further, as you know, we target 15% EPS growth and have a history of using years in which earnings are strong to invest part of that excess back into the business whether it be in the form of additional sales and service headcount, new product development or other investments and actions that provide strategic value and which help sustain our growth into the future.

Therefore, we advise caution to investors considering raising estimates in excess of our forecast at this time. We have no new information to report regarding the situation with Henckel (ph). Henckel's (ph) purchase of Dow (ph) was approve by Dow (ph) shareholders and closed in late March. Henckel (ph) has yet to announce its decision regarding permanent financing of the transaction and whether it will sell any Ecolab shares.

As you know, we have financial agreement with Henckel (ph), which among other things ensures an orderly process in the event Henckel (ph) might to decide to dispose of any of our shares. This includes the right of first refusal for any Ecolab shares to be sold by Henckel (ph). And the agreement contains appropriate provision to ensure an orderly public or private sale of any Ecolab shares should Henckel (ph) choose to sell.

We expect to move with Henckel (ph) as this moves forward and we have plenty of financial options available to ensure that w protect all of our Ecolab shareholders and retain our financial firepower for growth investments.

Regarding our merger agreement with All-Side (ph), we received hard (inaudible) clearance on April 8th. We are currently working with All-Side (ph) on the joint proxy statement prospectus and expect to file it very soon. Because this is a Securities registration matter, we have no additional comment at this time but refer you to the registration statement once it is filed.

Before closing, I'd like to mention that Ecolab will once again host a tour of its booth at the National Restaurant Association Show in Chicago on Monday, May 24 for professional investors. Please call my office if you'd like to attend. That concludes my remarks.

This conference call will be available for replay on our Web site through April 30th. Operator, please begin the question and answer period.

Thank you. If you would to ask a question, please press star one on your touch-tone phone. You will be prompt to record your name. To withdraw your request, you may press star two. Once again, to ask a question, please press star one. One moment, please for our first question. PJ Ajilikof (ph) of Smith Barney. You may ask your question.

Hi, Mike.

Hi, PJ (ph).

Quick question. You talked about adding to your sales force this year. I think you have something like 11,000 sales people. How many more do you plan to add this year?

We're looking to increase the sales and service probably around 4% this year.

OK. And then you've been talking about incentiving sales or cross selling. Have you worked out the details of how you're going to compensate people for that? And is there a system in place now to cross sell?

PJ (ph), I just want to mention that Al Schuman has joined us and can handle that one.

Hi, Al.

Yes, hi. How are you? Actually, we're getting a program that will be in effect in April and I think that's going to help us quite a bit.

OK, and if I may ask one more question to Al. You know, U.S. sales went up 2%, but if you look at GDP growth, if you look at restaurant sales, air travel. They were quite strong. So, are you somewhat disappointed with 2% growth in U.S.?

Well, PJ (ph), let me jump in for a second. I mean, the first thing is that as you look at our markets, they are recovering. We typically lag the markets by like about six months or so. So, we think we're absolutely on trend for that.

Secondly if you look at the room demand and the restaurant traffic, I mean, they're up a couple of percent. So, I think we're outpacing those. So, I think we're securely on plan. The third thing is, as we said, we're looking for institutional sales growth to be accelerating as we go through the year. We've improved over the fourth quarter. First quarter was strong and second quarter will be even stronger than that.

Well done, Mike.

All right. OK. Thank you.

Thanks, PJ (ph).

David Begleiter with Deutsche Bank, you may your question.

Mike and Al, can you address the very strong margin expansion you saw this quarter in U.S. cleaning and sanitizing? Some of the key drivers of that expansion?

Yes, we've doing a lot of work in the sales productivity, the product mix area. Further, as you saw in the U.S., we mentioned that we cut the GCS loss substantially. And we've seen improvements in all of our newer businesses - the non-core businesses have all improved their margins as well.

So, I think it's been a lot of great work on our part in developing the businesses and their operations as well as getting product mix improvement and cost savings to the organization.

On the cost saving front, Mike and Al, how far into the program are you? How much is left to be cold here over time?

Well, you know, people have the approach to cost savings, David. You know, it's like (inaudible). It's continuous improvement. So, you'll always see us every year going at cost and trying to reduce some. So, we think that, you know, this year we've got a good program going. We'll have more this year and next and years after.

And last thing, Al. Do you think we'll see a Henckel (ph) resolution in the next two or three months or it will be later in the year?

You can't tell, really. That's (inaudible) for awhile. We have no idea what they're thinking. The only thing I can tell you is that we're prepared for anything.

Marshall Reeve (ph) with Banc of America, you may ask a question.

Hi, good afternoon. A couple of quick questions. First, you did the (inaudible) deal. Is food safety an area you want to continue to invest in there?

Safety area?

Food safety.

Allan Schuman Yes, I think so. That's going to be a very big area for us. As you well know, we just went to a larger R&D facility. And I think we're going to be spending a lot more money in R&D and food safety is a very important issue for us. That's something you're going to see us really move into big time.

And more broadly on the acquisition front, how are things looking for 2004?

Well, I think real good. I mean, we're off to a strong start already with the acquisitions that we've made. And we hope to make some more. But as you know, Marshall (ph), on the acquisition deal, you may have a very full pipeline which we've had for the last couple of years. It's just all when you can reel them in. So, we've always had a lot of activity. We've always had a full pipeline. It's just when you can actually land them.

(inaudible) kind of a housekeeping question. What should we expect in terms of tax rates in 2004?

Well, we're forecasting around 37%.

OK. Great. Thanks.

John Roberts (ph) Buckingham Research. You may ask your question.

Good afternoon, guys.

Hi, John (ph).

Mike, you sort of indicated that if you make more money you'll spend more money on growth activities so don't get too aggressive with earnings estimates. I mean, you're in great financial shape already - generating cash, buying back stock. If you've got opportunities that you think you could roll out if you make more money, you know, I would think you'd be rolling them out right now.

Well, you know, it starts with the approach that we look at that over a long term basis. Our objective of 15% is a pretty good objective. And one of the reasons that we kind of target that is that we think with the many opportunities that we have, kind of the governor on that is that you need people to do it. You need good quality people.

So, for us because we're a service operation to have good people, I think there is kind of a limit to how fast you can grow the business by that. And I think 15% is a pretty attractive growth rate. So, for us right now as we go forward, we'll continue to look for new opportunities for growth and investment. And what we'd be looking at more than that is investments for new products, people for the future.

OK. And a minor question, but when does a janitorial business sort of anniversary its rationalization so that the reported numbers actually will start matching the continuing business?

About the fourth quarter.

The fourth quarter, if trends don't change, the fourth quarter will have reported up results?

Yes.

Bob Koort with (inaudible).

Can you hear me?

I can hear you now.

Good. Al, while you're there, I know you enjoy talking glowingly about your competition. Can you just give us an update on the horse race with your friends in Wisconsin and whether they're actually getting any new products out there to compete with you?

Actually, we see very little action from our competitors in Racine. They're doing their thing, but nothing visible, I'll tell you very frankly. And we're very disappointed in their performance.

Well said. And do you expect once you've passed the reins that there's going to be any change in strategy under your successor?

I think we're right on course. We're both in sync with our strategy and he's working very hard and moving along with it.

All right. And Al, I know there's got to be some nights you don't sleep too well. So, tell me what it is. It seems like this company, as always, is on autopilot in terms of continue to take market share and grow and it's just a very steady franchise. What is it that makes you uncomfortable?

Guys like you!

Thanks.

Couldn't resist that! No, the whole bit, really. As you well know, we can talk about the ability to attract very good people, OK. And we have a lot of good things going for us conceptually, strategically, new products and it's done with people. That's why when we invest we're trying to get the very finest people available and that's what we're working on.

So, when I think of what's bothering me it's the fact to attract the people we need and we're doing that job right now. If you get the right people we have all the ammunition necessary to achieve the numbers.

Robert Ottenstein (ph) with Morgan Stanley. You may a question.

Two questions. First, Mike, can you give a little bit more detail on the nice expansion on the gross margin?

Well, I think Robert (ph), it's the same things we talked about there where first of all we've had good operating improvements in all of our divisions. We've had an improved business mix and product mix. And ...

What's the biggest, I mean, Institutional's got the highest margins - gross margins - right? And it isn't particularly strong. Is it the divestiture and the change in mix of the professional products? Is that, you know, a lot what's helping that?

Well, that's part of it. But like is say, I mean, you can't get away from the fact that when you look at the whole mix of it all - the product mix, the business mix and the improvements in the business. I mean, when you take something like GCS and you're able to knock off several million dollars from that loss in there you're going to have a big impact on your margins.

Yes, I get that, but if you go back to the first half of 2003, I mean. U.S. and other services in the first quarter earning 5 million. In the second quarter of '03, you know, it earning almost 7 million and it was three and a half in the first quarter. So, I'm still having a hard time really getting a feel for where the improvement's coming.

Well, yes, we're seeing it in all of our divisions, most of the divisions, Robert. And again, it's coming from the product mix, she sales productivity improvement, the savings. It's a kind across the board thing that we're doing. There's nothing better than also getting some positive sales momentum like we've been getting for the fact that you get the operating leverage on that too.

Do you see the gross margin for the year being ahead of that - what you had in the first quarter.

Don't worry about gross margins right now. We're doing very good with gross margins. Look at our bottom line, OK? Gross margins probably stay in the same area. Maybe a very slight - probably be flat. We don't want to go too crazy.

We want to invest, again, into people. And investment is the key deal. I'm not looking to increase our margins too much. The point is to get that bottom line for you guys. That's the name of the game. The bottom line. And what we're doing is, OK, really, really enhance it by getting the - as you suggest, Robert - get more people on the street and that's what we're doing. So, we're putting investments in people big time.

Well, you're doing a great job, Al. Different question and this one for you, Al. Can you just kind of give us a post mortem on Facilitec as you look through the whole kind of life cycle of that? Where were the mistakes made and kind of what did you learn from the experience?

No, we're not really talking about a post mortem. I think Mr. Monahan gave you a good bit. We thought that this was not the business for us, OK? And very frankly, as we told you guys ahead of time that from now on if we do something we think that has that much potential we're out of it. And this was very small and the amount of work and effort to grow this particular type of business was huge. So, why spend the amount of time when we have so many other opportunities, you get rid of things that are not going to give you the opportunity. It was only 20 million in sales and the amount of effort that we had to take to really make it grow wasn't worth the effort. We said, OK. Let's concentrate on other areas.

No, well, I take my hat off for you making the decision getting out. But would you, going forward, do a little bit more due diligence? Think about these things a little bit more through? I'm just trying to get a sense, because you guys don't make a lot of mistakes on this stuff.

Bob, this is like a gnat on a you know what thing, you know? It's nothing. So, we thought cut. It's not a due diligence. It was a small operation and we got rid of it.

And Robert, I mean, when we went in the business we had a picture of what it would look like. As it developed it developed differently. I mean, if we're going to grow and be an aggressive growth company we're going to have to try a lot of stuff and some things aren't going to work.

So, as you say, I mean it's hats off for us for saying, we tried. This one didn't work. You know, our successes far outweigh the disappointments and this just happened to be one that didn't pan out because it ended up the customer perceptions changed as we went along.

Great. All right. Thanks a lot guys.

Thank you.

John Mcnulty of CSFB. You may ask your question.

Yes, hi guys. A couple of quick questions. First, can you give us an update on how your business with distributors like Cisco (ph) is going? I know they've been a little bit of a hiccup ...

A couple of quick questions. First, can you give us an update on how your business with the distributors like Cisco's (ph) (inaudible), been a little bit of a hiccup back in '03 and I'm wondering how that business is shaping up at this point.

Cisco's - our Cisco operation is going quite well and our whole distribution program is going quite well. I think we have excellent relationships with our distributors and being able to go to direct and vis a vis distributor gives us a niche in the marketplace that nobody else has per se, and I must say to you that it's a very, very good program for us.

So there's no inventory corrections and that type of thing which I think was the issue back in the second half of '03?

It was not a big deal, John, it was just one of the things we mentioned and I think like everybody they were tightening up a little bit as the recession slowed, but you're also seeing Cisco sales improve now, so we've got no problems and things are going well.

OK, great. And just with Facilitec (p) gone and it looks like you've cleaned up some of the other businesses like Janitorial and Textile Care, are there any low hanging fruit kind of assets where you're kind of like, look, this has got to either improve or it's time to think about getting rid of one, and if so, are these of any size at all at this point?

You realize that you never know in business, OK? And we look at all our businesses all the time now. You're going to see us be very aggressive in the marketplace regarding new businesses, at the same time checking everything we have in our inventory. So I - what we want to do is get the best value for our shareholder and that's what our objective is.

And John, as long as business meets our strategy, our profit objectives, it's going to be around. We're going to check things every year and more often if we need to, so it's a regular diligence that we've (inaudible) to these businesses and they're fit (ph).

OK. And then just the last question. In terms of Latin America, it seems like in the past that's been kind of something that just kind of sat out there, wasn't necessarily an aggressively grown business, but you certainly put up some solid numbers, at least for the quarter. What I'm wondering is have you taken a new approach down there where you're getting more aggressive or is this just more that tourism picked up and that's what's helping you out.

Well, we've been very aggressive in Latin America and we've been doing very well for the last few years. If you take a look at our numbers and when you consider the situation in Venezuela right now, consideration even in Brazil in the last couple of years, we're doing a heck of a job there and I think we're going to do even better this year. And we have a very good manager in Latin America, Tom Schmack (ph), OK, and he has a great team right behind him, a lot of qualified new people there, he's had a lot of very good hires in Latin America and so that's something we've been concentrating on and you're going to see even better results in the future.

Great. Thanks a lot, guys.

Bob Goldberg with New Vernon Associates, you may ask your question.

Good afternoon. Mike, I was wondering if you could just provide a little bit more detail on the cash flow. I'm just trying to reconcile the roughly $150 million increase in net debt from the fourth quarter to the first quarter. Maybe you have - you have the operating cash flow, by any chance, and how much you spent on acquisitions?

I'm sorry, you're trying to reconcile the increase in debt?

In net debt. I think net debt was a little bit under $600 million at the end of last year and is now at almost 740.

Yes, we spent about 110 million in acquisition, but I also recall that for debt we've got a 300 million euro placement so that's being affected by currency.

OK. Do you happen to have the cash flow from operations for the quarter?

Yes, it was 90 million.

Great. I have a question with - on the top line, that volume mix of 2%. Was there any significant penalty there from the product lines being divested or exited?

Well, the ones we talk about for healthcare and professional products would have added like a couple of points for the USC&S (ph) growth, so there was a penalty there.

For the company as a whole does that materially...

Just about a percentage point.

... 3% or 4%?

It was about a percentage point, yes.

OK. And again that would really anniversary when - in the second half sometime?

Yes, it's two different pieces, but sometime in the second half, right.

And thinking about looking at next year and beyond, I mean I guess this will - will this be a regular part of your operation? In other words, we shouldn't really expect you to stop exiting or getting out of different business lines, so it is part of the regular course of business, right?

I mean, you're constantly evaluating your products and product lines, so we'll continue to do that forever.

Thanks.

Dmitri Silversteyn with (inaudible), you may ask your question.

Good afternoon. I have a couple of questions. A lot have been answered already. Growth in European and domestic Institutional business is about the same at 3%, excluding acquisitions, and yet you characterize the regions quite differently in terms of opportunities and growth. Can you kind of revisit that and maybe put a little bit more color on exactly what's going on in the individual markets in Institutional?

Well, if you look at Europe overall, the economies still remain relatively sluggish and that's affected not only tourism, but also domestic consumption. So we point out a couple of markets a little bit better than the others, but overall, I can't call Europe a real strong area right now.

So would it be fair to say that 3% growth in Europe was a pleasant surprise and the 3% growth domestically was not so pleasant a surprise given a stronger end market here?

I think it was probably expected.

OK. All right. Second question, Greece got business that you're selling. Is this coming out -- where was it accounted for? Is it going to come out of GCS?

No, it was in U.S. Cleaning and Sanitizing.

Oh, it was U.S. Cleaning and Sanitizing. OK. In the Institutional accounts?

That's right.

OK. And has your guidance factored in the 20 million or so that you're going to be losing on an annual basis?

Yes.

OK. Very good. And finally, there's been no growth this quarter in Asia Pacific and Canada and the growth there has been spotty with - you know, I go back looking three years or so, and every year there's a quarter or two that has zero growth in those regions. Is that a normal dynamic or is it just a normal lumpiness in the business or what's going on and are there any concerns with this quarter's results going forward in these regions?

Well, I mean the big factor there, Dmitri, as you know, is Japan's been in the doldrums for a decade now and Japan's roughly about a third of our Asia Pacific business, so that's been an issue. The second thing is in Australia we've been going through the last year or so a renewal of the business where we've been getting rid of some low profit accounts and that's affected the top line there. I mean if you look at East Asia, we've been enjoying very strong growth. China, Korea, other areas of East Asia, we've doing very well in. It's mostly been Japan where again, like I say, being in the economic doldrums for the last decade, and the changes in Australia that have affected us. So I mean, we think we're doing pretty well there. If we get some improvement on Japan, we think that we'll start to see some pretty good growth out of Asia Pacific.

OK. But if I look at your guidance, top line excluding currency and acquisitions, you know you're looking at kind of low single digits, 2 to 4%, let's say, and this is a supposedly recovering industry for you so you should be seeing quite a bit of tailwind. Is this what I should be looking for longer term for the company growth as well? And I'm talking about internal growth.

No, I mean again, if you take the East Asia business, we're growing at high single digits in that area. It's Japan where we haven't been able to get much growth out of the markets to grow that business. So no, I don't think that's what you should look at long term, unless you're going to expect that Japan's economy is going to go nowhere for the next decade.

Mike, I was referring to the company overall.

In general for Ecolab?

Yes.

Oh. We're pushing 6 to 8% and we're telling you we're going to get better for the remaining part of the year, so I don't know where you're coming from.

Well, OK. Cleaning and Sanitizing was up 3% and (inaudible) services were up 6% in international, excluding currency was up 6% and excluding acquisitions up 3%. So that's where I'm coming from.

And we're telling you we're going to get better after it gets going. I mean, for example, we said that Institutional should see sales growth accelerate from the 1% in the fourth quarter, 3% this quarter, and the second quarter will be even higher, so it should accelerate as we go through the rest of the year.

OK. So mid single digits would be something I should look forward to?

Yes.

OK, thank you.

Jim Costell with Kiahoga Capital. You may ask your question.

Yes, hi. It's Jim Costell. I want to follow up on your comment earlier that you're ready for anything. After - assuming the outside closes and everything is done there - does the company have currently in place sufficient borrowing capacity that if the Henkel (ph) block were to become available at a reasonable price that you'd be able to go out and buy it or would you then have to - at that juncture have to go out and arrange some sort of temporary financing?

It's like we said. We are ready for anything. We've also said that as a result of anything that Henkel does we're going to ensure that we maintain our financial flexibility and a strong balance sheet. So there's lots of ways that it can be handled and we'll make sure that it's done in a way that ensures that Ecolab shareholders don't see any disadvantageous pricing, but we'll make sure that we also maintain Ecolab's balance sheet going forward.

About how big in total is your credit lines in place?

It's more than sufficient. It's listed in the annual report but I don't have that right now. But I don't think that's an issue, Jeff - or Jim.

OK, thank you.

Thank you.

Jeff Ducacus with JP Morgan, you may ask your question.

Hi, good afternoon.

Hey, Jeff, how are you?

Good. Maybe this is just another way of asking Bob Ottenstein's question. Your incremental gross margin in the quarter was 60% and normally Ecolab's incremental gross margin sort of resembles its average gross margin because so much of what you sell is contracted business, so can you kind of give us a little - can you cast a little bit more light on the strength of the incremental gross margin in the quarter?

It's still the same thing, Jeff. I mean, it's - I sound like a broken record. The business mix, the product mix, the efforts that we've made to continue to improve our cost picture.

Well then, maybe if I do it another way. I mean, if your incremental gross margins are 60% and your volumes are 2 or 3% this quarter but they're going up to mid single digits, then why are you cautioning people not to really raise their earnings estimates because...

Let me ask you a question, why would we do that? Let's start using your head. I mean, we are giving you a very good result and everybody listening to this knows exactly why we did that, so why are you trying to be so picky?

Hey Jeff, look at it - put another way is last year on (inaudible) and taxes, we picked up a nickel in the second half of the year. This year we don't think we're going to get that because, as we know, the dollar is strengthening and secondly, we're not going to have as favorable a tax comparison to the prior year because we're looking for taxes to be around 37%. So first off, in terms of EPS we're not going to get as big a pickup as we had in the second half. And the second thing is, like we said, it's our belief that if we do have earnings in excess of the range that we've got, we can use that as an opportunity to make expense investments in our business which will help bolster the long-term growth of the company. And that's the smart play for us. Rather than having one big year, we're going to try and build for the long term.

And as anyone here who's been following us for all these years, we'll probably know what number will come in there at the end of the year.

OK, thank you very much.

Well, if there's no more questions, thank you very much for your time and we appreciate your interest. If there's any questions, please give us a call on this conference call. Thank you.